UPDATE 2-UK investigates two insurers over banned sales commissions

By Chris Vellacott

LONDON, Sept 18 (Reuters) - Britain's financial regulator isinvestigating whether two life insurance companies breached newrules that ban the offering of commissions to financial advisersfor selling their products.

The Financial Conduct Authority (FCA) said on Wednesday ithad referred two unnamed firms to its enforcement division inthe latest clampdown on the financial sector, which has beentarnished by mis-selling and interest rate-rigging scandals.

The new rules aim to protect consumers by ensuring thatindependent 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But since they came into effect at the start of the year,banks have withdrawn from offering financial advice, causingconcern that consumer choice was diminishing while the costs ofqualified advice was putting it beyond the grasp of people onlower incomes.

Under the previous commission-based system, investors wouldonly pay if they bought a product from an adviser, whereas underthe new rules they are charged a fee for receiving advice.

"The key thing is to judge what is in the consumers' bestinterests and forcing more (advisory) firms out of the marketmay not be the best solution if there is no alternative route toadvice emerging from the market," said Bruno Geiringer, apartner at law firm Pinsent Masons.

Under the new rules, part of a so-called Retail DistributionReview (RDR), companies such as pension and investment companiesare not allowed to pay an adviser upfront for selling theirproducts only to claw this back through opaque product charges.

The FCA, which is attempting to create a "credibledeterrent" to wrongdoing with bigger fines and product banswhile pursuing cases against firms and individuals, warned itwould continue to do spot checks on the industry after recentlydiscovering the potential breaches to RDR rules.

"MORE CLARITY"

Clive Adamson, the FCA's director of supervision, said mostcompanies assessed in a review of the industry had already madechanges to address the regulator's concerns, but added: "Thefindings of this review reveal that the actions of some firmshave the effect of undermining the objectives of the RDR."

"We will revisit this area in the future to check that thenecessary improvements have been made," he said.

The FCA said some life insurers might be offeringinducements via support services such as research or managementinformation provided by independent advisers. It also identifieda number of joint ventures between product providers andfinancial advisers it said could lead to "biased advice".

The Association of British Insurers (ABI), which estimatesthat insurers manage investments of 1.8 trillion pounds ($2.9trillion) - equivalent to around a quarter of Britain's totalnet worth - called for more clarity on rules governingpartnerships.

With concerns growing about whether the RDR will lead tofewer people having access to good independent advice, Britishpoliticians have said they might take a fresh look at the way inwhich Britons receive financial advice.

Research published last year by consultancy Deloitte warned5.5 million people in Britain could become "financial adviceorphans", unable or unwilling to pay for advice. Up to a thirdof customers, particularly the less wealthy, could startdesigning their own investment portfolios.

HSBC, Barclays, Lloyds, RoyalBank of Scotland and Santander UK have cut4,000 advisers in the past two years after changing businessmodels to adapt to the new system.

They have also reduced the advice on offer, changed theirfee structures - for example by charging an upfront fee of 500pounds or 1,000 pounds - or restricted advice to those customerswith 50,000 pounds or more to invest.