Talk about the end of an era. From the FT:
Financial advisers are to be banned from receiving commission for selling investment, pension and life assurance products from 2012, under radical new rules announced by the Financial Services Authority.
In its Retail Distribution Review, the regulator set out new measures to “ensure that commission-bias is removed from the system – and recommendations made by advisers are not influenced by product providers.”
Commission – the payment made by industry providers to advisers who sell their products – has been blamed for a series of mis-selling scandals over the past 20 years, involving mortgage endowment policies, personal pensions and “precipice” bonds. But Thursday’s proposals are the first to acknowledge that the practice has harmed investors.
The FSA said: “The proposals bring to an end the current, commission-based system of adviser remuneration: we propose to ban product providers from offering amounts of commission to secure sales from adviser firms and, in turn, to ban adviser firms from recommending products that automatically pay commission.”
Instead, investors will be told how much the advice is going to cost up front, and will be given the choice of paying it as a fee, or having the cost deducted from their investment. Crucially, the amount the adviser receives for recommending a product will be determined by the investor, and not the product provider. . . .
This is of note not just because it marks a sizeable shift in the UK financial industry, where currently 80 per cent of advisers work on a commission basis, but also because a similar idea, but regarding brokers, is contained in US President Barack Obama’s recently-released financial reform plan.
Under that reform plan brokers will be required to act in the best interests of their clients, rather than just providing suitable investments; Obama wants advisers to be held to a higher fiduciary standard for their clients, in an effort to reduce conflicts of interest, like the FSA above.
From the Wall Street Journal:
. . . requiring brokers to operate under a fiduciary standard could force them to offer products that are less costly and more tax-efficient. They will have to disclose any potential conflicts of interest, such as any fees they may get for favoring one product over another. That could mean clients will be offered fewer proprietary products if the broker can find a lower-cost option elsewhere.
For example, a broker couldn’t put you in a mutual fund with higher fees — or one he gets a bigger commission for selling — if he could get a comparable fund with lower fees elsewhere, says Tamar Frankel, an expert on fiduciary law at Boston University School of Law. . . .
In short, we’re probably witnessing the slow dismantling of The City and Wall Street ancien régime, so to speak.
Related links:
Wall Street begins campaign to thwart ‘populist overreaction’ – Bloomberg