Dear Sir/Madam

In response to the above I submit the following comments: -

Q1. The clear literature and explanations we give to our clients regarding the structure of commissions and why they are related to the products and advice given have never caused any confusion. To abolish indemnity commission would be severely detrimental to the industry as it is this which pays for the work that the FSA insist we complete to create a clear and just paper trail to justify the advice given. If we simply converted to fees this would be very difficult to convince a prospective client that they must pay for work which is required to get to the point of giving advice, which would in turn have the effect of deterring a prospective client from taking advice before we have had the time to perform the necessary research and presentations, to then convince them of a need that they were previously unaware of.

Q2. No. If fees are the answer to providing advice, why then is PI cover related to investment premiums? The amount of commission received is directly proportionate to the liability carried by the adviser. If we simply charged a level fee for advice, will the ABI and FSA insist PI insurers adopt the same stance when assessing risk?


Q3. Partly. That advice differs between advisers is human nature. Depending on the risk of the client it may not be the best advice to pay off debt when surplus savings exist. This is discussed however clients' responses vary and must be taken into account. The new menu of fees is woefully inadequate and extremely confusing. It will now add to the time it takes for an initial meeting and in some cases confuse a prospective client into thinking that cheap is best. We have seen this is not the case with Stakeholder contracts and also the bancassurers. To explain to a prospective client the commission structures and differences of all of the contracts available before actually finding out what, if anything they actually require, will definitely confuse. It would be better if the commission structure was discussed on the particular contract after the decision to recommend it is made, very much as is the case now. To compare IFAs with bancassurers on cost alone is a great miss-representation since the two do not perform the same tasks. By bringing in another tier of adviser I feel that the general public will not understand where they can turn to for best advice and this will now have an even more detrimental effect on long term savings.

Q4. We offer a mixture of fee paying advice for matters such as IHT planning (where products are not necessarily required) and debt counselling. I understand this is fairly common in the industry and is therefore largely the reason why your figures show that a large proportion of advisers have been paid at least some fees in the past. This does not mean that all clients will be willing (or able) to pay fees as this is a market that requires the products to be 'sold' and not bought. The report ignores the fact that if we acted in the same manner as accountants and solicitors whereby we simply waited for clients to come to us with their enquiries, we would be bankrupt within 3 months. Our industry cannot be compared to these other professionals as until we can review a prospective client's circumstances it is usually not possible to ascertain exactly, if anything that can be done for them. If financial advice was legally required annually, such as tax returns, or on death, such as probate, then we would be better suited to charging fees. Unfortunately it remains the case that we must seek out prospective clients, however if we ask to see them and then inform them it will cost a fee without knowing in advance how we can help them, it is unlikely we would receive any new clients. Commission works if explained correctly and in the current format it works. This of course is with the exception of stakeholder products which we do not arrange as they do not cover the cost of meeting the client in the first place.

Q5. To abolish indemnity commission is unacceptable. This is the life blood of most small IFA firms like ourselves and whilst we are trying to move more to fees (with the great reluctance of many clients - including the very wealthy) and fund based commissions for annual servicing of clients needs, this will take several years to build up to a reasonable level and in my opinion will never cover the costs we incur. Our businesses have become very expensive to run due to over legislation and have less real value due to the constant worry of claims. The need for indemnity commissions will remain and whilst these do not represent all of our business, they will none the less be required for us to continue to trade.

To have commission structures the same for related products is not a clear explanation. If by this it is meant Investment Bonds pay the same as ISAs, this is a definite NO. The former are more complex contracts generally used for more in depth income and IHT planning. With the Government now plundering ISA funds for tax they no longer hold any benefits other than CGT. With careful planning CGT should never be paid anyway so these contracts are now all but redundant. The term 'related product's does not in my opinion give justice to the financial services market. Whilst a term assurance is a life assurance contract it does not make it 'related' to Whole of Life, they are generally used for entirely different reasons; pensions do not all come under the banner of Stakeholders and not all investments are the same. It is therefore very dangerous to assume that since they have similar titles, then they must be the same.

Annual reviews are important for some clients and offered to all. The fund based or renewal commissions do help towards these costs, however rarely fund them entirely. Renewal commissions in fact only just cover the cost of writing to a client with a brief summary of what the insurer/investment company are sending them. Letters to clients from these institutions are so complex that it is now necessary to send an explanation along with them. If we receive just 50p a month renewal from an endowment policy or pension, this doesn't cover the time required to review the client file, dictate the letter, type it and then post it. Clients in the main do not understand what work is undertaken on a daily basis on their behalf and should not therefore be in control of what we get paid when they are not aware of the onerous tasks placed upon us on a daily basis. Also ignored is the constant need to keep updated with technology, without renewals and fund based commissions, who would pay for these costs? Certainly not the clients.

Annual commission statements would be a good idea, however in the case where the renewals/fund based commission are very small this could prove more expensive to send and therefore push up the provider's costs and in turn make the contracts more expensive for the investor. The option to obtain this information online could be offered to the investor if they so wish to go and seek it. Too much paperwork is sent out already, this again would just increase costs and cause more confusion.

The right to change adviser should be available and if this means the commission would definitely move to the new adviser this would help keep all IFAs on their toes. This however would need to apply to ALL providers for both new and existing contracts. If not then what incentive exists to review older contracts that continue to pay the previous adviser?

If there is a reduced choice of commissions this will restrict the IFA from being able to decide how to fund his business. Commissions are discussed with the client and implemented in such a way by the adviser based upon what work he/she feels the client will generate on an ongoing basis. If this choice was restricted does this mean all clients must then be treated in the same way, regardless of their needs, based simply on the income we are able to obtain?

General Comments:

Our industry and profession as IFAs is now so strictly regulated that any advice/transaction performed on behalf of a client is documented in triplicate, combined with this has been the need to upgrade computer systems and pay for electronic filing and databases. This has caused a severe increase to our workload and costs, with a reduction in remuneration. Too much emphasis is placed on 'consumer' choice in terms of dictating how we are paid. This is not a consumer industry. We give advice to the clients that we seek out and find, not as is the popular misconception to the members of the public that knock on our doors daily! If we are forced to charge in the same way as accountants and solicitors we will not survive. Being given the option to charge fees should be the right of an IFA, not mandatory; this is the choice of the client. The relationship between PI cover and premiums must be removed if fees are to work and even then the option for commission must still exist.

Commissions are fair as they remunerate for work actually undertaken and to a certain degree permit cross subsidisation so that we can provide some of our advice to those who need it without needing to send them a bill.

If the fees demanded by the FSA, FSCS and PI companies reduced dramatically then perhaps we could afford to have our incomes reduced accordingly and then get paid solely by fees, however this is extremely unlikely. Fees only work and will continue to only work with a minority of the populace, giving them the choice is acceptable, but dictating to the whole is not.

Regards

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Hi Evan.

I whole heartedly agree with the comments of Mr X

One other concern is the mention yet again of VAT. It seems to me that every
time I read about commissions verses fees VAT rears it's ugly head.

Do you think that it is a case of "the more we hear it mentioned the more
comfortable we would feel if it was introduced"? I can already hear the
Weary Willies of our industry saying " I knew it would only be a matter of
time before it was introduced".( you know the type)

I am no expert on how the government administrates VAT but my best guess is
that it must be a lot easier to charge it on fees than on commissions.

Maybe I am being a bit paranoid with the way the inners of Mr Brown's head
works, but then again he thinks that the best way to encourage the general
public to save for its retirement is by increasing tax ( e.g.. ISA and
Pensions etc.). The thought of all that commission being paid out without
VAT surely cannot sit well with him.

He is paid very well for the sale (spin ) of these ideas, but I am not sure
if he is paid commission or fees or salary.(please advise)

Comments invited

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