Simplified advice is set to be resurrected by the FCA in light of Chancellor George Osborne’s sweeping pension reforms set out in the Budget and the accompanying “guidance guarantee”.
After the regulator refused to back down on simplified advice, saying it needed to meet the same qualifications and adviser charging rules as full advice, the model has failed to gain real traction.
But in the wake of the Budget, and Osborne’s pledge to support the reforms with at-retirement guidance, it has emerged the FCA is keen to reignite the model.
Speaking at the Money Marketing Retirement Planning Summit in Luton last week, EY financial services senior adviser Malcolm Kerr said: “We have been engaging with the FCA for two or three months because they are really keen to resurrect simplified advice. They want to make simplified advice happen.”
Independent regulatory consultant Richard Hobbs says the urgency of delivering Budget guidance forces the FCA into a corner on the issue of financial information for the mass market.
Hobbs says: “There has clearly been a pretty intense dialogue between the Treasury and the FCA. The economics of full advice do not work on retirement pots below £100,000, so my sense is the FCA has been cajoled by the Treasury to look again at the way information, guidance or advice gets into the hands of customers when full-scale financial advice provided face-to-face by an adviser is not possible.”
Ahead of the Budget, the FCA had already started carrying out a thematic review into simplified advice models and non-advised sales. It is expected to report in the summer.
A spokesman says: “We are also looking at whether or not there are barriers that make it difficult for firms to create and implement effective non-advised models, something FCA chief executive Martin Wheatley committed to look into at a Treasury Select Committee hearing in February. We are aiming to publish an update on both pieces of work this summer.”
What went wrong?
Intended to be the last word on what was and was not allowed under simplified advice propositions, the regulator’s final simplified advice guidance was published in March 2012.
Williams Goddard Consulting managing director Peter Williams led an industry lobbying effort at the time calling for a “basic advice plus” regime requiring QCF level three qualifications.
Williams says the regulator’s fear of reducing the quality of advice and potentially increasing the risk of misselling hampered the development of simplified advice.
He says: “The reason why simplified advice did not really move forward is because the regulator wanted the advice to be delivered by level four advisers.
“You have to ask why someone would want to do simplified advice which is lower value if they have qualified to level four? So the market responded with little enthusiasm.”
Firms wanting to deliver a simplified advice model also have to contend with the prospect of complaints being referred to the Financial Ombudsman Service.
Despite the regulatory uncertainty, some firms have launched in the simplified advice space. These include advice firm and discretionary fund manager Money on Toast, which offers a fully automated advice process via the use of decision trees and risk profiles. It claims to offer a suitability report within minutes.
Founder Charlie Nicholls says: “One big fear is the FOS because they are separate to the FCA. There have been problems before because you can develop something and then in five years time they can come back and say ‘what you did was wrong’. That is one of the biggest fears behind the current regulatory structure.”
Nicholls believes the compliance and professional indemnity insurance risks are actually lower than fully regulated advice.
He says: “We take the view that we have a better compliance overview than a traditional firm because when you automate the process, you have complete control and you can be completely happy with the advice before you put it out there.”
The use of technology can reduce the cost of delivering simplified advice compared with the cost of training advisers to level four and the associated continuing professional development.
Wealth Horizon launched last month and offers an online advice process with regulated advisers available to speak to over the web or telephone. Chief executive Chris Williams says: “It is about providing individual choice about how they want to interact with us. They can do it all digitally or they can do it with some assistance. But if their needs are complex and require face-to-face advice, we refer them on.”
Can more be done?
Larger firms have said they want to build simplified advice offerings but have concerns about the existing regulatory set-up.
Network and national Lighthouse Group has previously indicated a desire to build a commercially viable service and has called on the FCA to be more proactive in discussing appropriate propositions with firms.
Peter Williams says one solution is for the FCA to overhaul its policy of refusing to rubber-stamp products.
“The regulator must be far bolder,” he argues. “What we really need is for the regulator to approve bespoke products or have something like a kite standard which the FCA has approved. But it refuses to go that far.
“But that is the only thing that is going to allow those at the fringes in because at the moment they are scared stiff about what happens if it goes wrong.”
The regulator has publicly said it does not see itself as a product regulator. However, it recently launched Project Innovate, an invitation to advice firms to engage with the regulator to discuss ways they can build new propositions.
So is there scope to revive enthusiasm around simplified advice?
In its 2012 guidance, the regulator said it was “not convinced, as some commentators appear to be, that the RDR will mean many consumers who want and need advice will not be able to access it.” It said it saw the Money Advice Service and auto-enrolment as initiatives which could see the mass market receiving financial assistance where they are unable or unwilling to access advice.
Kerr believes the Government’s guidance guarantee, whereby all savers will be offered “free, impartial, face-to-face” guidance, could see the creation of a new paid for “guidance” service offered by advisers. He says: “The guidance piece that has emerged from the Budget may end up replacing simplified advice. There is not room for another model. You have got advice, simplified advice, basic advice and the MAS, which is not advice. So I am not sure another model will make things clearer for consumers.”
He says if Government and FCA-approved guidance can be supplied at the complex at-retirement stage, the same rules could be applied to those offering investment guidance.
Kerr adds: “I reckon it is possible guidance may emerge as a third way. Advisers could charge for a non-advised service under guidance. The problem is we do not know what guidance looks like at the moment but I think when it emerges it will probably look quite a lot like advice. It would be quite a neat solution but at the moment we are still working on the concepts of simplified advice and guidance.”
This week, industry stakeholders, including Apfa, the Institute of Fin-ancial Planning and Which?, have told the Treasury providers must not be allowed to provide guidance. It raises the prospect of a vacuum which could yet be filled by advisers.
FCA broadens scope of retirement income market study
Simplified advice is not the only aspect of the FCA’s work feeling the knock-on impact of the Budget.
The FCA has broadened the scope of its retirement income market review to look at risks associated with new products following the radical pensions reforms announced in the Budget.
In February, the regulator announced a 12-month competition study into retirement income after publishing its annuities thematic review which found serious failings in the current market.
In his Budget speech in March, Chancellor George Osborne announced plans to allow savers to take their entire pension pot as cash when they reach age 55.
The FCA has now set out revised terms of reference for its market study.
It will cover the new products and business models likely to arise in response to the changes in the Budget as well as the role of advice and guidance.
The study will also look at the at-retirement guidance service announced alongside the Budget reforms as well as wider consumer protection issues. The FCA will undertake a comparative analysis of international approaches to retirement planning in countries where annuitisation is not compulsory.
A supervisory review into sales practices of annuity providers was originally going to form part of the market study into retirement income.
The FCA says the focus of this work remains unchanged.
Good and poor practice identified by the review will feed in to the market study as well as the FCA’s consultation on the implementation of the guidance guarantee.
Derbyshire Booth managing director Greg Heath:
As things stand I would prefer the Government to deal with financial information for the mass market. Advisers will always be open to new ways of dealing with clients but the existing rulebook just does not allow it and the liability risk is too high. For the industry to really help tackle this issue, there needs to be a hatchet taken to the rulebook.
We need to demonstrate the client has the same outcome from advice whether they received it face-to-face with an adviser or via an online process. This means ensuring FCA rules have been followed, the client is educated about what they are purchasing and they are aware of the appropriate risks and commitments.
It is vital all clients understand the correlation between risk and return and we have gathered enough information about the client’s circumstances to give a balanced and appropriate investment recommendation. Wealth Horizon was set up to offer a fully regulated service to meet simple investment needs.
We only offer advice and do not dress it up as guided, focused, execution-only, direct offer or any other jargon terms that are banded around in the marketplace to claim the client made their own decision. Those terms are used by firms in an effort to ensure no liability rests with the firm. That is not what good business and good advice is about.
Chris Williams is chief executive of Wealth Horizon