David Prosser: Financial advice is not so simple

Outlook It is getting on for 25 years since Margaret Thatcher's Conservative government first tried to legislate so as to introduce some regulation to the world of financial advice. Since that 1986 Financial Services Act, there have been scores of attempts to improve the system – often following a new scandal – and now the Financial Services Authority fancies having another bash.

At first sight, the banning of commission that the FSA proposes is long overdue. Under the current system, many financial advisers earn their living through selling products on which the provider decides what level of commission is payable. That means customers can never be sure whether the advice they receive was given because the product recommended is the best one for their needs or because it paid the biggest commission to financial advisers.

The industry understandably takes umbrage at such assertions, but it's certainly noticeable that certain perfectly decent products that don't come with commissions – investment trusts, for example – are rarely sold by advisers paid this way.

Here's the hitch. Financial advisers' customers have proved remarkably resistant to paying for expert counsel in any other way. They have simply refused to shell out an upfront fee for advisers' time, however economically irrational that might be given that handing over sales commissions deducted year after year from premiums is often far more expensive overall.

There is a danger, therefore, that forcing financial advisers to charge fees, even if customers have the option of paying through deductions from premiums rather than in one upfront sum, puts people off asking for independent help with their personal finances.

To compound the problem, the FSA proposes to split the financial advice market in two. Advisers will have to be truly independent, advising on products from across the whole market, or "restricted", which will in practice mean they work for one product provider, most often a high street bank.

Most analysts expect the less able independents to find fee-based advice a particular struggle – it is likely, therefore, that they will gravitate towards the restricted sector.

The result could be that the FSA's well-intentioned reforms end up having a doubly damaging effect – either putting people off taking any financial advice at all, or leaving them in the hands of advisers who will often be less skilled.

Getting rid of commission-based advice certainly makes sense, but may have some unfortunate unintended consequences. This is why there have been so many attempts to reform the system over the past two decades – and why there will probably be still more in the future.