Britain’s financial regulator is investigating whether two life insurance companies breached new rules that ban the offering of commissions to financial advisers for selling their products.
The Financial Conduct Authority (FCA) said on Wednesday it had referred two unnamed firms to its enforcement division in the latest clampdown on the financial sector, which has been tarnished by mis-selling and interest rate-rigging scandals.
The new rules aim to protect consumers by ensuring that independent financial advisers recommend suitable products, without bias, rather than promote ones that earn commissions.
But since they came into effect at the start of the year, banks have withdrawn from offering financial advice, causing concern that consumer choice was diminishing while the costs of qualified advice was putting it beyond the grasp of people on lower incomes.
Under the previous commission-based system, investors would only pay if they bought a product from an adviser, whereas under the new rules they are charged a fee for receiving advice.
“The key thing is to judge what is in the consumers’ best interests and forcing more (advisory) firms out of the market may not be the best solution if there is no alternative route to advice emerging from the market,” said Bruno Geiringer, a partner at law firm Pinsent Masons.
Under the new rules, part of a so-called Retail Distribution Review (RDR), companies such as pension and investment companies are not allowed to pay an adviser upfront for selling their products only to claw this back through opaque product charges.
The FCA, which is attempting to create a “credible deterrent” to wrongdoing with bigger fines and product bans while pursuing cases against firms and individuals, warned it would continue to do spot checks on the industry after recently discovering the potential breaches to RDR rules.
Clive Adamson, the FCA’s director of supervision, said most companies assessed in a review of the industry had already made changes to address the regulator’s concerns, but added: “The findings of this review reveal that the actions of some firms have the effect of undermining the objectives of the RDR.”
“We will revisit this area in the future to check that the necessary improvements have been made,” he said.
The FCA said some life insurers might be offering inducements via support services such as research or management information provided by independent advisers. It also identified a number of joint ventures between product providers and financial advisers it said could lead to “biased advice”.
The Association of British Insurers (ABI), which estimates that insurers manage investments of £1.8 trillion ($2.9 trillion) – equivalent to around a quarter of Britain’s total net worth – called for more clarity on rules governing partnerships.
With concerns growing about whether the RDR will lead to fewer people having access to good independent advice, British politicians have said they might take a fresh look at the way in which Britons receive financial advice.
Research published last year by consultancy Deloitte warned 5.5 million people in Britain could become “financial advice orphans”, unable or unwilling to pay for advice. Up to a third of customers, particularly the less wealthy, could start designing their own investment portfolios.
HSBC, Barclays, Lloyds, Royal Bank of Scotland and Santander UK have cut 4,000 advisers in the past two years after changing business models to adapt to the new system.
They have also reduced the advice on offer, changed their fee structures – for example by charging an upfront fee of £500 [$803.60] or £1,000 pounds [$1607.21] – or restricted advice to those customers with £50,000 [$80,360] or more to invest.