There has long been an important problem in the selling of and advising on retail financial products.  Large numbers of individuals and firms call themselves “financial advisors” or even “independent financial advisors” when they are not really advisors at all, but salesmen.  What I mean by this is that they have a direct financial interest in the customer deciding to buy one product rather than another, because they are paid on commission, and hence are in no position to provide unbiased advice.  Their claim to provide independent advice when their incentives are so biased amounts to a form of fraud.

To try to get around this problem, regulation has engaged in all sorts of contortions.  Those selling retail financial products have a duty imposed upon them to provide advice that is in the best interests of customers; those selling products of just one company had to describe themselves differently from those selling products of many companies, and so on.

None of these contortions would have been necessary had a simple expedient been adopted, as I have urged for many years and as the team I directed recommended in the recent large project we did for the European Commission on credit intermediation: those who describe themselves as “advisors” should have no financial interest in the products on which they advise; those with such a financial interest must indicate that they have such and describe themselves as “sales personnel”.

The FSA’s reform announced last week finally identifies this problem correctly, but its solution goes too far – it bans all commission selling.  This is neither necessary nor efficient.  There is nothing bad about selling, provided it is clearly such, and commissions are very useful incentive mechanisms to encourage selling effort and reward good performance.  Unfortunately this means the FSA’s latest reforms of the advice regime are unlikely to last much longer than their many previous repeated false starts.