Political and regulatory news
Issue 5 - 14 December 09
Advisory market restructuring offers investment company opportunities
The AIC welcomes the FSA's plans to reform the distribution of investment products.
The AIC has welcomed the Financial Services Authority’s proposals to overhaul the provision of investment advice (see previous article). The FSA is seeking to improve the quality of advisory services and to remove distortions created by conflicts of interest. However, these proposals could be made even better with some further targeted adjustments.
The FSA intends to divide the advisory market into firms offering ‘independent’ advice and those providing ‘restricted’ advice. Independent advisers will have to consider a broader range of investment products, including investment trusts. This will mean more intermediaries researching what the sector has to offer and making comparisons with open-ended funds. This obligation should be made even wider to encompass all investment companies. Independent advisers would then be obliged to consider other listed funds and VCTs. Retail investors would benefit from consideration of a wider spectrum of potentially suitable investment opportunities.
The FSA should also provide a clearer outline of how the provisions on independence should work. This would include explaining what ‘unbiased’ advice constitutes. The AIC has suggested that it should involve ensuring advice is driven by client needs and their attitude to risk, and not influenced by the adviser’s personal or financial connections, family links or other, unrelated, incentives – such as soft commissions. Clarity on these issues would help advisers uphold the highest standards and help consumers to assess whether or not they are receiving the best possible service.
Particularly welcome is the FSA’s plan to abolish payment schemes for advisers which create the potential for commission bias. Under the new framework, advisers will have to set their charges independently of the provider or product being recommended. Separating the price of advice from the provision of specific products will remove the risk that investment recommendations are influenced by higher commission rates. The FSA envisages additional safeguards to remove potential conflicts where an adviser is employed by a product provider. How this works in practice will be critical, but this policy intention offers an excellent opportunity to reshape the market and increase the value which consumers place on independent advice. In the long-term this will benefit both consumers and the advisory community.
The precise impact of these changes on the investment company sector is as yet unclear and real changes in the market are some way off. However, the proposals do create the potential for investment companies to become more visible in the retail market and for new consumers to be attracted to the sector. The AIC will be following the process carefully to ensure that the most can be made of this important change when the rules come into effect at the end of 2012.
To view the AIC’s response to the FSA’s consultation paper 09/18 “Distribution of retail investments: Delivering the RDR” click here.
Next article: Reforming tax rules for investment trusts
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