The chief City watchdog today announced a dramatic shake-up of the way investment products are sold, in a move which is set to deal a killer blow to commission-based financial advice.

In its Retail Distribution Review, published today, the Financial Services Authority proposed sweeping changes to the investment industry, which has been harmed by repeated episodes of commission-driven mis-selling.

The RDR proposes to end the existing set-up, where product providers, such as unit trusts and insurance companies, decide on what level of commission they pay advisers for their products, with the advisers then deciding which products to recommend to clients.

Critics have long argued that this resulted in a potential conflict of interest for advisers, who might be tempted, or appear to be tempted, into recommending products according to the commission they earn rather than what is suitable for the client.

Instead the RDR proposed that customers and advisers should first agree on the amount of payment without any outside influence from product providers. The aim is to move the industry away from the current psition, where more than 80 per cent of advisers’ payment comes from commission, towards a more fee-based approach. Jon Pain, the FSA’ s managing director of retail markets, said: “We want to see an end to commission playing any part in the choice of any investment product.”

Commission will not be totally outlawed, but if an adviser does recommend a product carrying commission, this will have to be made crystal clear to the client, who will have to be told that this money is coming directly out of his or her own pocket. The current lack of transparency over commission has left some consumers with the mistaken impression that commission-based advice is ‘free’.

The RDR is also insisting on a clear distinction between independent advisers, who are unbiased and can recommend products from across the entire market, and sales advisers, who offer products from a limited range of companies or just one.

All advisers, whether independent or not, will have to reach a minimum qualification, in most cases the equivalent to the first-year level at university, and there will be a new professional body for advisers that will have teeth and be able to discipline members who fail to meet the required standards.

Andrew Fisher, chief executive of Towry Law, a wholly fee-based adviser, said: “This report is absolutely fabulous. This is a huge step forward for consumers and means that commission-driven advice is going to wither away.

“From now on if you want to sell clients a £100,000 investment bond and the commission is 7 per cent, then you are going to have to tell them that you are taking £7,000 upfront and that £7,000 is coming directly from their pocket, leaving them with an investment of just £93,000. How many people are going to opt for products with high levels of commission when things are presented to them as starkly as that?”

Dennis Hall, of Yellowtail Financial Planning, another wholly fee-based adviser, also welcomed the new proposals, though he felt they did not go far enough. He said: “I welcome the requirement for advisers to have a professional qualification and the greater transparency over commission payments, but it is a pity commission was not abolished completely. We also have a long way to go in educating people about the distinction between tied advice and genuinely independent advice. But this is a definite step in the right direction.”

The British Bankers’ Association gave its backing to the moves outlined in the RDR. Angela Knight, chief executive of the BBA, said: “The banks support the FSA’s approach to reforming financial advice: ensuring that everybody knows what they are paying for, and that they get what they are paying for. Separating the cost of the product from the cost of advice will bring clarity and certainty to consumers, and the drive towards greater professionalism among advisers will ensure their advice is of a reliable quality.”

But not everyone was happy with the RDR. Chris Cummings, director general of the Association of Independent Financial Advisers (AIFA), said his members wanted a clearer distinction between independent advisers and sales people. He said: “We are disappointed that the FSA has bowed to presure from the banking and insurer lobby to allow their salespeople to continue to call themselves advisers.” He also objected to the proposed new Professional Standards Board. “This is not the time for new regulation or new regulators.”

The RDR will now go out to consultation until June 2009 and final implementation of the proposed new structure is scheduled for December 2012.

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