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Chris Hannant: A chance to shift FCA advice regulation

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The Treasury launched a review of the financial advice market at the start of August. It asks the (old) question of how to provide financial advice to mass market consumers, a need that has been put in the spotlight by pension reform and the problems some have had in securing an adviser.

Ask any adviser about the problems they face and you will get a similar answer. Top of the list of concerns will be the cost of regulation and liability, including the soaring cost of FSCS levies; the uncertainty of the facing the FOS; and the lack of a “longstop”. These add to the cost of providing advice and so make it harder to economically serve clients with more modest means.

The debate on financial advice often gets muddled over the use of the term “financial advice”. Sometimes it is used to denote general financial planning and sometimes regulated investment advice.

With wealthier clients there is a significant overlap, but they are not the same thing. I think it interesting that the Treasury defines “financial advice” in a broad sense, including the provision of mortgages, general insurance, pensions and savings. For many mass-market clients, their need for investment advice will be limited, perhaps only relevant to their pension arrangements.

There are different regulatory requirements that apply to recommending a mortgage or insurance product, but there is also something that is more than the sum of the individual regulated activities: financial advice in its broader sense.

If it is divorced from the Mifid suitability requirements for investment advice there may be scope to offer a service with less draconian liabilities attaching to it. If it is recognised (particularly by FOS) that there is no one right solution for people, but a range of outcomes that are good and choice will depend on client preferences, then it may become viable to offer a different service at a much lower cost.

The logic of the RDR points to advice as a service distinct from the sale of products, but the rulebook still regulates product sales. Perhaps it is time for the regulator to recognise that there are two kinds of financial advice.

It is an opportunity to change the framework for advice – I would encourage advisers to let us know your views so we can get it right.

Chris Hannant is director general of Apfa

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Been thinking this through and I don’t how you can separate the two things from a regulatory perspective. Surely there are things people need one side- something they want to buy, an income in the future, to buy a house, to start a business, to help their children, to protect their family…..and the other side is a range of investments and products they could take out to meet them- even if you have a pot of investment you want to do something with it- get an income of £xxx, get a growth rate of £xxxx- the difference between a pension, an ISa, An OIEC etc is nothing but the most effective tax wrapper- the underlying investment strategy should sit under all of them- so how can they be divorced in terms of regulation.

    I have looked at a lot of cases recently and the advice that has been given and I actually don’t see any burdensome regulation where a customer actually does need decent advice then there are no shortcuts- nor should there be as whatever anyone says I believe the advice always gets affected. the ‘I just want to top up my isa’ requirement can easily be met online nowadays- more importantly is what are they saving for, what is their ATR, what age are there, what are their circumstance as for many the answer wouldn’t be an ISA at all post pension freedoms.

    Where I do see that regulation has gone mad is trying to blame a SIPP provider for a customer taking advice elsewhere and being advised on rubbish- so think MORE regulation is needed to stop those so called advisors from doing it and to encourage more freedom of choice and action for those who want to and are willing to take the decisions without paying for advice. I recently had to advice someone about their pension who had been in the industry for 30 years and knew as much about investments as my advisor did- yet he had to pay us to give advice because a provider refused to act- I suspect directly off the back of some of the recent FOS cases.

    I do completely agree that the rulebook and most compliance processes are still based around product sales and not advice processes and even when I talk to advisors they haven’t put the past behind them at all and still only think they can get paid if they sell a product. I would be keen to know whether we really are supposed to be driving to being paid for our advice or whether these are still product charges- just paid to the advisor rather than via the provider as commission.

    I for one would love to contribute to this review in a meaningful way.

  2. Good article. Essentially it is all about cost, control, liability and stability. I run a small advisory practice that desperately needs to expand. In doing so I will be investing a chunk of my own money and future income as my practice costs will increase significantly.

    At present I am struggling to convince myself that such an investment is a good idea. The main reason is the constant rule changes. The FCA could wipe us out with a rise in capital adequacy or some other brilliant regulatory idea. The FSCS could up their levy still further and the FCA could continue to increase its fees way way beyond inflation. At some point this ceases to be profitable.

    These would be my wishes:
    1. The FCA, FSCS, FOS, MAS etc should set a five year fixed levy at a sensible level. Ideally these could be a percentage of turnover so that we could transparently pass them on to our clients. A percentage would align the F-Packs interests with our own. It is time they spent according to what the industry can afford.
    2. A rule change to allow both the client AND adviser to challenge FOS rulings through the courts. Justice should be available to all and FOS could represent the client so they are not deterred by legal fees. Legal accountability would improve FOS decisions and should make such actions unnecessary.
    3. A Long Stop.
    4. A period to let the RDR rules bed in. Part of the problem is that constant rule changes mean that rather than planning the future of business, firms are simply struggling to survive the next regulatory hurdle. If the government really wants mass market advise they need to provide a stable environment where firms can plan their future, devote resources to expansion and know that the rug will not be pulled from under them.

  3. I do feel that compliance support firms and departments need to get involved in the loop. I recently looked at a suitability template supplied by one such firm and I am left somewhat bemused. On the one hand you get Rory Percival stating that suitability letters should only identify what the client’s objectives are, what the solution is and how this solution meets those objectives. On the other hand you get templates such as the one I saw which expects you to go into War and Peace – which all adds significantly to the cost. What should surely be expected when giving advice should not necessarily be what the client needs to know – like why was that provider or platform chosen, what was considered as an alternative and why this was rejected. Does the client need to know this? Yes according to many templates I have seen.
    It is as if everything that we have to do and document has to be incorporated in the client facing material. Hugely expensive when giving bespoke advice. Of course this makes it easy for compliance consultants to review cases remotely by simply ticking their boxes by looking at the suitability letter rather than going through the file. But at what cost?
    The attitude of FOS and the conduct of claims lawyers is certainly relevant but we also need to know how much the information the client needs to have to meet our legal obligations. There is a case which argued that a client could not be expected to agree with the recommendation if they were not in full receipt of all relevant information – which is? Who knows? Then of course there is MIFID II which proposes more onerous requirements on advisers….

  4. Deja vu is a wonderful thing, unless you are a regulator and can claim “it wasn’t me guv, honest”.

    If we look back to 2011 we can see the banks offering advice/sales to consumers and, let’s be clear, millions of consumers were content with this, regardless of the quality of the advice. We had thousands more whole of market advisers and of those more were ‘independent’ because at that stage the regulator had not re-written the dictionary definition.

    All of the hand-wringing and posturing makes me sick because many of us foretold this scenario to the FCA and various MPs and they all shook their heads and told us we were wrong.

    The new big idea will be robo-advice and the like but, as always, this ignores the reality that it only assists those consumers who make the effort. The rest will continue with their lack of advice, lack of protection and lack of retirement income.

    Deja vu indeed.

  5. Compliance Thought 14th August 2015 at 1:20 pm

    Mr Hannant, why don’t you build a process from start to finish for both a current sales process, and for a process you would like to see and then compare how long each one takes.

    That way you will have something to take to the regulator for their opinion.

  6. This issue will never be resolved unless there is a complete rethink of what is meant by advice. As things stand, “this is what you shy do ” is advice. “This is what you could do” isn’t advice.

    My problem with the first statement is that it implies certainty on the part of the adviser but in most decisions there is a high level of uncertainty. The customer also may be misled into thinking that the advice comes with an absolute guarantee. “You told me to do this, it turns out to have been the wrong choice so I’m holding you responsible”

    We see this with “pension freedom”. The big unknown is how long the client will live so how can we be certain which is the best option yet to be advice we have to say this is what you should do.

    I’d like us to act more like other professionals such as accountants and solicitors where the emphasis is on helping the customer make an informed decision and then carrying out their instructions to the best of our ability.

    And maybe at the other end of the spectrum the focus should switch to regulating the product rather than the advice process. Clear transparent charging, simple products that do exactly what they say on the tin

  7. I agree with all the comments above. I would have been keen to have got involved in the review had I not got so involved at the early stages with RDR (when Amanda Bowe was still heading the review) and having been pretty much ignored as were most advisers. Amanda said they would be an RDR AND and RDIP, but as with the 2nd Gulf War, the proponents got so excited with the war/changes, they forgot to have an Implementation plan for the peace and to communicate it.

  8. Christopher Petrie 15th August 2015 at 10:22 am

    I totally disagree with Mr Lakey that the banks selling to millions of people used to be a good thing. They ripped off millions of people as the ongoing PPI saga exemplifies.

    RDR had one big result…it stopped banks ripping off their unsuspecting customers and to my mind that was worth RDR in itself.

  9. @Chris – With regard banks, regulated advisers in banks didn’t sell PPI it was a non advised sale as part of the process of loan application. In the 1980s it was lending staff who encouraged customers to take out PPI and they were rewarded for penetration on loans. From 1992 onwards loan approval in NW/RBS became automated. Under both systems customers had to opt out of PPI by a tick box. Ironically only regulated advisers could advise NOT take PPI and the banks regulated advisers routinely recommended term assurance and IPP was used instead of PPI.
    The banks senior staff established sales based systems which ripped off consumers, BUT regulated advisers at banks were often better trained and supervised for compliance than brokers (IFAs).
    The flaw with bancassurance was that senior management wanted to get quick sales in regulated advice services comparable with non regulated PPI sales and hence set high and unachievable targets when regulated advice takes time to build client relationships and become profitable (10 years plus)
    Regulated Bancassurance should be a good thing for consumers and is little threat to the remaining IFAs in the industry as the mass market is not where most of us deal anymore.

    • Good points Phil.

      Many of the “IFAs” trading today arrived via bancassurance and on the whole it was a seamless journey. The market was well served with the cost conscious public being sold expensive bilge (to pay for the “free advice”) and the more educated members of the public sought out an IFA (with many also being sold expensive bilge). No idea what the answer is (I do not think it is going backwards to commission or robo advisers though) but would rather have you involved in the discussions rather than the muppets who currently claim to represent the interests of advisers

  10. I note Mr Hannant is getting in his two pennyworth at an early stage so that if (the big if) and when meaningful change comes about he can claim all the credit for it on behalf of APFA and say to its many doubters: There ~ told you that you need us. What’s Libertatem ever done for you?

  11. Not all bank advice was bad. If we look at insurance it is absolutely true that any life/health insurance is better than none.

    We can all wring our hands and point to where the banks investment advice or PPI chicanery has gone sour but we can now see a world where without the banks offering products there is even less take up then pre-RDR. That cannot be an improvement.

  12. The banks, dare I say it, could be a force for good. But plainly this cannot happen without much closer regulatory supervision. It is the lack of such supervision that allowed them to run amok and sell a lot of people a lot of poor quality products, not to mention mis-selling a lot of people products that might actually have been of value. PPI isn’t a fundamentally bad product, as all the people who’ve successfully claimed on their policy and, as a result, have been saved from losing their home, will (if they’re honest) readily testify.

    But because of virtually no regulatory policing of the sales process and the resultant industrial scale mis-selling of PPI that took place, it’s quite possible that a lot of people who should have PPI now won’t touch it. Those people may well lose their home as a result of not having cover on their mortgage payments that they ought to. Who’s fault is that? The banks for mis-selling PPI or the regulator for having failed to ensure that they sold it properly? Six of one and half a dozen of the other if you ask me.

    The problem for the banks, of course, is that selling PPI properly is quite a time (and profit) consuming process. Aviva offer it (or at least used to) as a quite moderately priced extra within their MPTA contract, but the range of options available take a long time to set down and explain. That’s what the banks just can’t be bothered with. So they should (by the regulator) be given an ultimatum: Do it properly or not at all.

    Were they to do it properly, they could sell a lot of it without at a later date being forced to pay out billions of pounds in compensation for having mis-sold it.

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