FSA to develop Menu approach for paying for financial advice

In its Consultation Paper 121, the regulator discussed potential ways to help consumers compare the cost of financial advice. The FSAs objectives were:

• reducing the potential for commission bias

• making consumers more aware of the cost of advice; and

• facilitating shopping around by consumers.

To address concerns over commission bias, CP121 proposed that independent financial advisers should in future operate a so-called defined payment method of charging their customers. However, in the light of consultation responses and following constructive suggestions from the industry, the FSA has decided that the objectives could be better met instead by developing a so-called Menu approach.

The Menu is envisaged as a document provided to consumers in the early stages of the sales process. It would set out:

• An outline of the services the adviser is offering

• For independent advice, the option of paying by fee and a fee scale

• Where offered, the option of paying by commission and, for a range of popular products, the commission that the adviser normally charges, set alongside average rates charged in the market.

The FSA will now work with the industry to develop the ideas fully and will consult next year on draft rules for the Menu. It is aiming to develop ways of applying the menu approach across all advice channels, not just the independent sector.

David Severn, Head of Retail Projects at the FSA, said

"We want to help consumers be more confident about the advice they are receiving, to know what theyre getting for their money and compare one adviser with another.

Some constructive proposals came forward in the responses to CP121 and, of those, the Menu option offers the best route for us to achieve our objectives. Importantly, it will ensure that the form and level of adviser remuneration and scope for negotiation is signalled to the consumer up front."

The FSA will make a further announcement on the outcome of its consultation on the reform of polarisation before the end of the year.

Notes for editors

1. The Menu option was the result of a working party convened by AIFA and IFA Promotion, based on an original concept contained in AIFAs response to CP121.

2. A defined payment system would require an upfront agreement between the customer and the IFA which defined, in advance, the amount to be charged. This charge could be calculated in a number of ways and would not be a fixed price for every customer. It could be a fixed total charge, a fixed regular charge (a "retainer" fee), an hourly rate or an annual percentage of funds for portfolio management activities. In return for the payment, the IFA would have agreed either to:

   • rebate any commission payable into the customer''s investment product;

   • offset any commission received against the fee payment due; or

   • pay any excess commission directly to the customer;

   • A fee conditional on the purchase of a product would be regarded as commission.

3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.

4. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.