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FSA to review impact of incentives

The Financial Services Authority has revealed it will look at the impact of incentives within the financial services industry as one priority in its review of retail distribution.

The regulator has outlined five themes that it will take forward in the main phase of the Retail Distribution Review. These include the sustainability of the distribution sector, the impact of incentives, professionalism and reputation, consumer access to financial products and services, and regulatory barriers and enablers.

It will publish a Discussion Paper in the middle of next year, setting out its analysis, initial conclusions and any recommendations it draws from this. It will mainly focus on the investment sectors but the mortgage and general insurance sectors will also be considered.

The first theme of the review aims to investigate whether current distribution business models are sustainable and to gain an understanding of the drivers for profitability in the sector. It will create an assessment of where value is added, and where it is destroyed.

The second theme is professionalism.

Clive Briault, managing director of retail markets at the FSA, says: “We want to understand more about why financial advisers are not generally considered in the same light as professionals such as lawyers, accountants and surveyors.”

He adds: “We believe there is a close link between the professionalism and reputation of financial advisers… and the sustainability of the distribution sector.”

Thirdly, the impact of incentives will be looked at to consider their impact on the efficiency of the market and on the cultures within financial firms in the way that firms are paid.

Briault says: “We are keen to understand how far commission structures between provider and distributer influence the decision of the distributer – to what extent does commission lead to detriment?”

He adds: “The very fact that major product providers increase their commission levels to gain business share suggests that commission influences business flow. But do all commission arrangement result in detriment to the end customer? And if so, what are the alternatives?”

The fifth theme is regulatory barriers and enablers, and the FSA will examine whether its regulation of the retail market creates barriers to greater market efficiency.

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