UK FOFA equivalent takes effect

Reforms mirroring the Australian Future of Financial Advice (FOFA) legislation took effect in the UK on 31 December 2012, amid concerns the new regulations may lead to job cuts in the financial advice industry.

Among the new rules implicit in the Financial Services Authority's (FSA's) Retail Distribution Review (RDR) - a broad suite of reforms aimed at enhanced consumer protection - are increased restrictions on product commissions for financial advisers, including 'soft' commissions and cases of intended consumer rebate.

"Instead of the adviser being paid commission, they now have to explain to you how much advice will cost and together you will agree how you will pay for it," explains a statement on the FSA website.

"You will now come to an agreement with the adviser, whether to pay an upfront fee, or for the adviser to take their fee from your investment. A fee might be paid in a lump sum or instalments," it continues.

The reforms seek to remedy what the FSA perceives as a lack of transparency in the UK financial advice sector, including new professional standards requirements such as compliance with a new industry code of ethics.

"These changes are about making the cost of advice clearer - where else would you buy something without knowing in advance how much it costs?" FSA's head of investment intermediaries Linda Woodall wrote in a statement to the British press.

"Customers will now know how much advice is costing them, the service that they are receiving and be reassured that their adviser is qualified," she added.

Speculation has grown that the new restrictions will lead to job losses, with British bank Lloyds TSB announcing it will cut as many as 600 financial advisory positions in the wake of the RDR implementation, the Mail on Sunday has reported.

By contrast, HSBC UK said it has "embraced [the] positive new change," in a statement on the bank's website, adding that "[the reform suite] offers a number of benefits for our customers."
JP Morgan Asset Management has also welcomed the reform's implementation, while also warning that the industry may be adversely affected from a commercial standpoint.

"Consumers have always had to foot the bill for financial advice, but adviser charging will - for the first time - make the cost of all investment advice absolutely explicit," said JP Morgan's head of UK retail Jasper Berens.

"For advisory firms that already charge fees profitably and compliantly, the 2013 deadline should hold no worries; for those firms that have been remunerated primarily by commission, the new responsibilities posed by adviser charging may be daunting," he said.

According to a report released by JP Morgan to assist with RDR compliance, while 60 per cent of consumers approve of fee model implicit in the reform package, only eight per cent of the UK's population currently pay for, or claim to be willing to pay for, financial advice.

In responding to the move in the UK, the Australian Financial Services Council (FSC) has reiterated broad opposition to regulation of the financial services sector.

"Over-regulation is one of the key concerns of CEOs in the financial services industry in Australia," an FSC spokesperson said.

"In many cases regulation does not pass a simple cost-benefit test and is crippling productivity growth."

 

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