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Caught in a trap? Advisers warned over auto-enrolment compliance risks

Advisers who jump into offering automatic-enrolment services without the necessary knowledge and expertise are running the risk of falling foul of compliance, experts  warn.

There are growing fears advisers believe they have to offer clients help with their auto-enrolment duties to retain business and are entering the market unprepared. Hundreds of thousands of small and medium- sized employers will be hitting their staging dates each month from the end of 2015, putting massive strain on business owners – many of whom will turn to their advisers for help.

Independent compliance consultant Adam Samuel says: “There’s a real danger here of IFAs diving in and then realising they don’t know enough about the right bits.

“There’s a real risk of people trying to recommend the wrong solution for auto-enrolment. There is a tendency among advisers in the corporate pensions environment to do things for which they are not properly insured, and not necessarily regulated.”

IT

IT is an area where advisers need to be particularly careful, says Samuel.

“A lot of IFAs get an IT solution sold to them which they are hopelessly ill-qualified to advise on because that’s not what they know about,” he says. “In the real world, that’s advice. If something goes hopelessly wrong, their professional indemnity insurance will not pick it up because it’s not insured.”

Principal Financial Solutions director Chris Daems agrees there is a “great risk” of inexperienced advisers tripping over regulations.

“Most advisers assume auto-enrolment is all about pensions when in reality it’s more about systems and processes and project management.

“Advisers can still build these systems and have a robust and compliant process moving forward, however there are two things they need to be aware of.

“Firstly, without these robust procedures, falling foul of regulation will be more likely, especially if the adviser just dips their toe into auto-enrolment. Secondly, and especially as we approach the SME and micro market, the systems and processes advisers build to service their clients need to be as streamlined as possible with clear lines to designate who is responsible for what.”

However, Rowley Turton director Scott Gallagher thinks the bigger issue is not of advisers’ liability – as employers are ultimately responsible for auto-enrolment – but in having insufficient knowledge to help clients comply.

“It’s not as simple as thinking, ‘we’ve got employers who need help, we know about pensions’. It’s not a compliance risk in the traditional sense but there’s a lot to learn and a lot you could fall flat on your face,” he says.

Competition

Nest central account manager Paul Budgen warns if advisers do not offer auto-enrolment services they “run the risk of a client going to a competitor adviser and finding out that existing business relationship is at risk”.

His warning is being echoed across the industry.

Standard Life head of corporate strategy and propositions Jamie Jenkins says: “Advisers have told me a year ago they were just servicing private clients but started to realise that a lot of people they work with have a connection to auto-enrolment and want to know about it.

“They said it’s a risk if we don’t get involved that they’ll go somewhere else. And vice versa – we’ve seen corporate advisers seeing opportunities to take on private clients after working on auto-enrolment.”

LEBC divisional director of group savings and investments Glynn Jones says “jack-of-all-trades” advisers could be “taking on a lot of risk” by taking on auto-enrolment work they don’t full understand. He says rather than seeing other firms as a threat, advisers should consider subcontracting out technical auto-enrolment business to specialists.

Accountants

Ringrose Grimsley IFA Victor Sacks says he works with a whole range of professionals to serve clients’ auto-enrolment needs.

He says: “I can’t see how 20,000 advisers can serve one million companies on their own. They need to get accountants involved.”

Recent figures from The Pensions Regulator reveal how SMEs are planning to turn to accountants rather than IFAs, as their staging dates approach. While 27 per cent of medium-sized employers plan to speak to an IFA compared with just 14 per cent who favour an accountant, a quarter of micro employers plan to consult their accountant.

First Actuarial director Henry Tapper says accountants are seeing auto-enrolment as a big opportunity and claims advisers could “lose out” if they don’t participate.

“There’s a danger of losing business to accountants. If they do a good job on auto-enrolment, the client might go to them first next time there’s a problem”, he says.

Accountancy firm Woods Squared director Alan Woods says his firm sees big opportunities in auto-enrolment as many advisers have not wanted to take on the administrative burden. “The impression we’re getting with the smaller IFAs is they don’t want to be involved. They used to take commission from individual pensions and now they’re not sure where the money comes from.”

Accord Financial Planning managing director Matt Ray is one such adviser who is not interested in auto-enrolment. He says individual planning is his focus and the heavy investment needed in knowledge and resources would offset any benefits. But he concedes his lack of involvement could impact his professional relationships. 

“For accountants for instance, it might often be easier for them to deal with one adviser”, he says.

Woods says if employers find their advisers are reluctant to help with auto-enrolment, his firm will recommend an adviser who is.

Cost of business

Nest’s Budgen says if people think there is not enough money to be made in auto-enrolment business, they do not have a good enough grasp of the opportunity.

He says: “Nobody has ever operated in this kind of market – this is mandatory, we’ve never known anything like this before. 

“A lot of wealth managers say they will do this pretty much at cost because then they have other opportunities to speak to directors about their affairs and other benefit structures, such as group life cover. It’s a really good way of speaking to lots of small employers you haven’t spoken to before.”

Woods says some advisers are treating auto-enrolment as almost loss leading business, with little or no profit margin but necessary to retain important client relationships.  

But Gallacher says: “The demand is massive, the supply is low – you don’t need to be loss leading to have those doors open to you, they’re open anyway”. 

He says advisers who go into business with third parties “need to make sure there’s a proper agreement to ensure they don’t poach your clients”.

He says the next few months represent the “last chance advisers have to get into the market”.

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Expert view

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I firmly believe advisers should focus on where they feel their strengths are. If an adviser feels helping employers with auto-enrolment is not their bag, they should avoid it. 

There is a huge commercial opportunity with over a million employers yet to comply. There is  a massive advice gap when it comes to auto-enrolment. But there are also other niches which can be equally as profitable.

There is a small risk that advisers who do not get involved with auto-enrolment, and who have business owners, managing directors and finance directors of businesses, have more competition due to that individual building a relationship with their corporate adviser. However, this can be mitigated by collaborating with specialists in the auto-enrolment sector who you trust to manage AE on behalf of these clients, leaving the high-net-worth adviser to deal with what they feel they are good at.

There is a great risk advisers fall foul of regulations. Most advisers when they get into the auto-enrolment market assume that it is all about pensions when in reality it is more about systems and processes and project management (and a tiny bit about pensions). We learned that early on and built systems and processes designed to ensure we could help employers comply.

As a rule I do not believe in “loss leading work”. Auto-enrolment as a task needs to be profitable in its own right or should not be done. This was relatively easy in the large and medium-sized employer market but is tougher now (and in the market we will be in in the next few years). However, I believe the secret is in ensuring streamlined or automated procedures to ensure  auto-enrolment can be complied with in the SME and micro market.

Chris Daems is director at Auto Enrolment Advisory Group

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Avoiding Auto Enrolment is scheduled to be the next National sport. Big employers will love it as it enables them to reduce liabilities, dumb down their pension offering and save money all round.
    The SMEs and particularly the small firms with 20 employees or less; will (and do) hate it. It takes away choice; flexibility adds to cost and increases bureaucracy. Seeing as most IFAs fish in this pool I guess they would be best advised to either avoid it entirely, or help their clients (the firms) to minimise cost and admin.

  2. Auto enrolment compliance is mainly a payroll problem, Accountants who run payroll for employers are much better placed to ensure the employer complies with the mainly administrative burden. IFA’s could be involved in sourcing a compliant scheme, but they should leave the admin to Accountants. The biggest opportunity for IFA’s is to use AE to develop professional relationships with Accountants.

  3. A lot of good comment and the issues relating to AE are very much at the forefront of our service propositions to retail and corporate clients.

    However, I must take issue with the, in my opinion, arrogant statement made by Alan Woods “……..They used to take commission from individual pensions and now they’re not sure where the money comes from” Really? Has he heard of the RDR.

    I’m not sure what type of IFA’s he is interacting with, but all of my colleagues and peers most definitely know how and where their money comes from. Mr Woods statement just confirms how out of touch many of the accountancy profession is with the ‘real’ world of financial planning.

    Chris Daems appears to be the voice of reason, AE is not for every IFA, and if it is not they should not be criticised for that. But please, let’s not have throw away comments like that of Mr Woods, that are clearly uninformed and for the vast majority of IFA’s wrong.

  4. Agreed, AE is not for every IFA. There are a number of parts to AE compliance including, qualifying workplace pensions, payroll management and the PRP assessment, understanding the legislation and on-going administration. Those IFAs with the necessary pension, administration and project planning experience can offer a very valuable service to employers. However, this should be in conjunction with payroll and when required solicitors on such matters as contracts of employment.

    IFAs, Payroll providers and accountants need to work together. As regards accountants, most in practice know very little about the detail of AE and most payroll providers have little knowledge of the complexity of the legislation but they do provide excellent number crunching and administration services.

    In my own case I am an employee benefits consultant with 30 years experience of pensions, pensions law experience and project management for employers but I wouldn’t even try to advise on payroll functions. As part of an accountancy practice we have a payroll company and an HR consultancy. Professional service providers should concentrate on what they are good at in order to provide the right solution and service to employers. There is a danger that some advisers will try and take on advice on areas where they lack the expertise rather than referring to a specialist.

    There have been calls in the professional press and on media such as Linked In that advisers who advise on automatic enrolment should be qualified. Although I think that this is the way to go it is difficult to see which qualification should be used. There is the PMI certificate in automatic enrolment but it may not be detailed enough, although a good starting point.

    There are compliance risks for the unwary adviser be it a regulated adviser or one of the unregulated firms that are popping up. The Pensions Regulatory doesn’t just have powers to fine employers for non-compliance but also third parties such as IFAs, payroll providers and accountants.

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