As the FCA launches a call for input to gauge the effectiveness of its regulatory shake-up, advisers reveal where more action is needed
No two pieces of regulation have changed the advice profession in the past decade more than the RDR and the Financial Advice Market Review.
The RDR raised the minimum level of adviser qualifications, changed the way charges and services are disclosed to consumers, and banned the use of commission to pay for financial advice. Most of these rules took effect in 2012, although advisers have mixed views on whether loopholes still allow for less-than-ideal practice.
The regulator published its first post-implementation review of the RDR in December 2014, concluding that advisers were actively raising their levels of qualification and that product bias and product charges had been reduced.
However, the review also found that while the quality of advice had improved, the cost of it and, subsequently, the advice gap had risen considerably as well.
FAMR was launched in August 2015 by the Treasury and the FCA, with the aim of finding ways to stimulate the market for affordable advice and guidance in a post-RDR environment.
Its initial review came in 2016 and included 28 recommendations for the FCA and the Treasury. That, in turn, was met with mixed reviews by the industry, with many stating it had failed to directly identify the sector’s grittiest issues.
An Aegon survey from April 2018 suggested only one in seven advisers believed that the measures introduced in FAMR were actively helping to close the UK’s advice gap. It also found advisers did not think the measures were helping individuals take advantage of full financial planning services in practice, two years on from the release of the final FAMR report.
While 70 per cent of advisers agreed with a new definition of regulated advice designed to make the distinction from guidance clearer, 69 per cent thought it would not boost engagement.
Furthermore, nearly half of the respondents said clearer guidance on what can be provided through streamlined advice was a positive, but only 16 per cent believed it would have a “real-life” impact.
Last week, the FCA published its long-awaited call for input to assess whether the changes brought about by RDR and FAMR have been effective after more time to bed in.
The review has 24 questions relating to the effective functioning of the industry have now been presented.
These ask respondents to consider accessibility of advice and different consumer groups, barriers to accessing and affording advice, and the historic lack of trust in the industry. Also flagged are issues around the development of new models, their capacity to deliver advice to underserved consumers, the growing influence of robo-advice and the difficulties regulating it, and the emerging risks for the market.
The FCA also asks if its regulatory system may drive too many people into advice as opposed to guidance, and what barriers may be limiting provider competition.
The call for input has been welcomed by commentators, who have flagged up the benefits RDR and FAMR have brought to the advice profession, but also the areas that need work.
We just want customers to get the right advice
The key thing we want to get in our call for evidence is whether consumers are receiving the right guidance and advice. We also want to hear if consumers are getting value for money, to understand the impact of regulation in the market and future market developments as well.
When it comes to value for money, the key point in our review is you have to look at not only cost, but the broader proposition too.
RDR and FAMR have had benefits in terms of improving transparency and prices.
We want to understand some of the benefits more deeply, as the early signs have been encouraging, like the changes in technology and innovation. All those things might have an impact on consumers’ experiences and that is what we want to test. In terms of how this work slots into our co-operation with other bodies, I can say this: the review is looking at advice and guidance in the market in the broadest possible way.
Therefore, it is relevant to any work we do with the Money and Pensions Service and The Pensions Regulator.
If there are certain things we need to involve them with, then we’ll do that. Similarly, our recent intergenerational discussion paper is about how income and wealth could evolve. It is relevant because societal changes will have different influences on various consumers.
Both of these pieces of work are crucial in understanding different consumer needs both now and in the future, in terms of guidance and advice.
Nisha Arora is director of policy at the FCA
Pace of change
The call for input mentions previous pieces of research to measure whether the RDR and FAMR changes have been effective so far.
The FCA’s data bulletin from June 2018 published information on the market for financial advice relevant to RDR.
It said the reported number of adviser staff across all firms was 26,311 in 2017, an increase of 3 per cent compared with 2016.
The number of intermediary firms had also increased, from 4,970 in 2016 to 5,048 in 2017. Furthermore, the number of firms has been increasing steadily, by 10 per cent since 2013. Finally, the bulletin noted revenue from commission as a proportion of total revenue for retail investment businesses continued to fall following the RDR commission ban.
In August 2018, the FCA published interim consumer research to inform its ongoing work on FAMR. Some of the findings from this show there was a statistically significant increase in the number of people taking regulated financial advice after 2017, putting the figure at an additional 1.3 million.
There was also a significant increase in the use of guidance services and automated advice services to help with financial planning decisions.
More men than women received advice, and the propensity to take advice was found to increase markedly with age, wealth and education levels. The call for input goes on to explain a number of steps that will build on this research going forward to widen accessibility for advice. The watchdog has now laid down plans to host several events to gather feedback from interested stakeholders and conduct further research over the course of 2019.
There are also two annexes that accompany the call for input which explain how the FCA will measure the effect of RDR and FAMR. Annex 1 reveals how the FCA will measure both the short- and long-term indicators of success of RDR.
These include to what extent consumers understand the distinction between different types of advice, advisers who meet required standards of professionalism and fewer unsuitable sales. Annex 3 does the same for FAMR outcomes, and mentions measuring affordability, quality and access of advice as the indicators of success.
Owner, Candid Financial Advice
The FCA banning commissions in 2012 was a really positive step, but many consumers are now paying a lot more for financial advice as a result of advisers hiking their fees. The FCA needs to get tough and compel advisers to display a clear rate card on their websites.
Scrapping sales commissions at the end of 2012 as part of the RDR was also a seismic step towards cleaning up the financial advice profession. Removing the financial incentive for advisers to recommend one product over another has undoubtedly benefited consumers as well. The unintended consequence is many advisers effectively doubling their annual fees since.
Aegon pensions director Steven Cameron is positive that the call for input will generate some much-needed focus. He says: “The 2019 review offers a real opportunity not just to assess effectiveness against the original aims of the reviews, but to reflect on recent changes and look ahead at how regulation can best-meet the future needs of both consumers and advisers.
“We are keen for the FCA to re-focus on closing the advice and guidance gap.
“Recent measures to protect individuals who don’t seek advice are helpful, but enabling more people to get advice would be a better solution.”
The negative focus on defined benefit schemes in the past two years stemming from the British Steel Pension Scheme fallout made them an area of interest. Cameron is worried about the potential barriers to accessing advice for members of DB schemes in particular.
He says: “There is a real risk of a growing advice gap for members of DB schemes, where advisers are struggling to obtain affordable or adequate professional indemnity insurance.
“While a DB transfer is unlikely to be in the majority of people’s interests, having a market where only a minority are able to even explore whether it’s suitable is not helpful.”
He adds that the adviser charge and the pensions advice allowance – a government tax incentive to take advice – should be merged to simplify arrangements for consumers.
Financial adviser, Walker Crips Wealth Management
It is clear that the RDR and FAMR have been successful as the underlying suitability of the advice being provided across the industry has greatly improved.
Client outcomes have become more of a focus of advice, improving trust and forging better relationships between advisers and their clients. An unintended consequence of both the RDR and FAMR, however, is the reduction in available advisers and corresponding increase in costs to clients. Advice has become a preserve of the wealthy.
Another major consideration is the ongoing issue with “phoenix firms”, where failed advice firms reinvent themselves as claims management companies.
Banning this would increase trust and reduce bad practice.
Cameron concludes: “We’d also like to see the FCA renew its efforts to move to risk-based Financial Services Compensation Scheme levies for intermediaries, and we’re keen for the FCA to offer more practical support to employers to grow advice and guidance through the workplace.”
Intrinsic chief executive Andy Thompson says the watchdog’s questioning about the value of advice will be the main point of interest for respondents.
He adds: “The RDR and the FAMR were wide-ranging and time has moved on since then, so it’s important that the regulator focuses its energy on the most pertinent part of those reviews.
“This is an excellent opportunity to tackle some of the challenges within the advice industry that mean it isn’t working to the best of its ability to help the public make the most of their money.
“The FCA’s questions reveal its areas of interest, which include a number of questions on value for money. As currently phrased, those questions are slated as ‘what do consumers value from advice and why?’
“It’s important to recognise that one of the major challenges the advice industry faces is how it articulates its value and helps consumers understand what they gain and how.”
While Mifid II has laid down the need for advisers to explain fees and corresponding value more clearly, Thompson argues this has been limited in its requirement. He says: “Historically, the focus has been on investment returns, but that does not capture what advisers are actually doing.
“The basics of what advice offers also include taxation, and helping clients navigate their own biases and uncertainty around finances.
“This, combined with investment choices, provides a measurable, quantifiable difference. As an industry, we need to do a better job of flagging that value.”
While the necessity of advice continues to build, Thompson notes there are fewer advisers per adult in the UK than ever before.
Approximately 750,000 people retire each year and represent just one category of potentially financially vulnerable consumers in need of advice.
Thompson says: “The FCA needs to consider carefully what the misunderstandings are around advice and how it can help boost its positive profile in this review, because trusted, insightful financial advice is the best way for people to achieve financial security and prosperity.
“Greater political emphasis also needs to be placed on the importance of expert financial help, whether that is guidance, debt support, help budgeting, or professional financial planning.”
Have RDR and FAMR worked? The FCA’s 24 questions
- How do different groups of consumers access appropriate advice and guidance? Does this vary by financial need or consumer group?
- Are there any barriers to consumers accessing advice or guidance that meets their needs, or to firms providing them?
- Do consumers have the right information to compare advice and guidance services, and to shop around? How easy is it for them to compare services?
- What barriers exist to making advice or guidance services more affordable?
- Do advice and guidance services offer sufficient quality and choice to meet the needs of different consumer groups? Are any consumer groups underserved?
- Do consumers have confidence and trust in advice and guidance services, and do these services address their needs?
- Do consumers who take advice or use guidance services get better outcomes than those who do not? If so, how, and if not, why not?
- What are the key advice and guidance services offered in the market and do they meet the needs of all consumer groups?
- What new business models are being developed and how will they meet consumer needs?
- What aspects of advice and guidance services do consumers value and why? Does it vary by consumer group or financial need?
- What emphasis do consumers place on the cost of advice and guidance, against other elements of value for money?
- Are there any barriers to effective competition between firms offering advice or guidance?
- Are the rules and guidance around advice and guidance working well?
- Are there points where the regulatory system may drive too many people to seek advice?
- Does regulation support the development of advice and guidance services, including automated advice services, that work well for firms and consumers? How can it be improved?
- Did FAMR or the RDR result in unintended consequences that have caused consumers harm?
- How have consumer needs for advice and guidance services changed since the RDR and FAMR initiatives were introduced?
- Are there any new or emerging trends (for example, the ageing population and increased pension flexibility) that will lead to further changes in consumer demand for advice and guidance services?
- What changes to the market might be needed to encourage consumer interaction with, and good outcomes from, advice and guidance services in the future?
- What market developments have taken place since the RDR and FAMR reviews? What impact have these had on consumers, the market and competition?
- What future market trends do you expect to see and what do you expect their effects will be?
- What opportunities and barriers are there for developing advice and guidance services in the future?
- What emerging risks to consumers do you see in the market?
- Is there any other evidence we should consider in our review of the RDR and FAMR outcomes and indicators listed?