The chief City watchdog today confirmed it was set to ban all commission-based advice in a move that will sound the death-knell for the old style adviser industry.

The proposals will result in dramatic changes for both advisers and product providers as the Financial Services Authority (FSA) attempts to repair the damage caused to the industry by successive episodes of commission-driven mis-selling.

In its consultation paper on the Retail Distribution Review, published today, the FSA says it will introduce much greater transparency into the sale of all investment products. The move will mean a huge shake-up of the advisor industry’s old-style business model, where about 80 per cent of payments came through commission, and trigger a massive switch to fee-based advice.

The RDR intends to demolish the existing payment structure in the industry, where product providers such as unit trust groups and insurers include built-in commission in many of their products as an incentive for advisers to recommend them. There would be a ban on financial groups offering commission to secure advisor recommendations. At the same time advisers would not be allowed to recommend products that automatically pay commission.

An FSA spokesman said: “Our aim is to ensure that inbuilt commission is basically removed from financial products so that customers can clearly see that there is one charge for the product and another separate charge for any financial advice. This should spell the end for both initial commission and trail commission in products such as investment bonds and unit trusts.”

He added: “Payment to an adviser from an investment product (what is currently called commission) will not be totally eliminated, but it will have to be agreed up front by the customer in advance and it will very clearly come out of the customer’s investment.”

The current lack of transparency over commission has left some consumers with the mistaken impression that commission-based advice is ‘free’.

There will be a clear distinction between independent advisers and what the RDR terms ‘restricted’ advisers. Independent advisers will be those who are free of any bias and who can recommend products from across the entire range of the relevant market. All others will fall into the ‘restricted’ category, which is likely to include staff selling products in bank branches.

All advisers, whether independent or not, will have to reach a minimum qualification, which will be equivalent to the first-year level at university. There will also be a 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 spells the end of commission-based advice - something we have been campaigning for for a long time. It’s a great step forward for consumers.”

There was a broad welcome for the proposals among the investment industry, though some financial groups expressed concern about whether less well-off consumers would be prepared to pay for fee-based advice. Fiona Fry, regulatory partner at KPMG, the accountant, said it was vital that the FSA made a success of guided sales - the low-cost mass market alternative to independent financial advice.

A spokesman for the ABI, the insurance industry's trade body, said: "These changes will herald a sea change in the delivery of financial advice. However we are disappointed that the proposals do little to encourage savings and advice for the mass market."

The RDR, a review of the way investments are sold in the UK, which was launched in 2006, will now invite comment from the industry before finalising proposals which are due to be implemented in December 2012.

Times Recommends

• How to sell your home in a downturn
• How to boost your spending power
• Unemployment benefits explained