Two years on, has the FCA’s flagship reform to improve access to advice been a success or just a damp squib?
Advisers are concerned that while reforms outlined in the Financial Advice Market Review will eventually have a positive impact, progress so far has been disappointing on improving access to advice.
Critics point to a stubborn advice gap that threatens to undermine the aims of the flagship review.
Making affordable, high-quality advice and guidance more available is one of the four key goals outlined by the FCA in its FAMR progress report this time last year. However, concerns around streamlined advice, automated services and cross-subsidy are just a few of the issues advisers say still need clarification.
Whether FAMR remains on track to deliver on the 28 recommendations it laid out remains a topic of debate, with advisers saying that more information is needed before coming to a verdict.
Two years on from the final report and one year on from the progress review, Money Marketing speaks with advisers and consultants about why the spotlight has come off industry reform, and whether there are too many regulatory fingers in the FAMR pie.
Walking the walk
Zero Support consultant Phil Young says there is a feeling among advisers that the pension freedoms have exacerbated the advice gap.
He says: “A few years ago, I would have agreed there was no such thing as an advice gap, but pension freedoms have opened up that up and FAMR has not done anything at all to make it easier and cheaper to get advice.”
Measures around streamlined advice and tax breaks for employer-arranged advice are a start, but a survey from Aegon shows that advisers do not think they help customers take full advantage of advice services.
While 70 per cent of advisers agree with FAMR’s new definition of regulated advice, clarifying that it must include a personal recommendation, 69 per cent say this is irrelevant until it has an impact on the uptake of advice.
Nearly half of the respondents to Aegon support the updated guidance on what can be provided through streamlined advice, but only 16 per cent believe that it will have a “real-life” effect on the delivery of advice.
Clear debate on how streamlined advice might be made to work in a range of scenarios is yet to be had.
Aegon pensions director, Steven Cameron says: “One of the initiatives that I personally hoped could help close the advice gap is the expanded use of streamlined advice. Not everyone needs holistic financial planning advice and focusing on a particular need should, in theory, mean costs can be lower.”
The FCA’s FAMR goals
- Good availability of affordable, high quality advice and guidance, which supports consumers at all stages of their lives.
- Greater innovation in the interests of consumers, encouraged by a flexible and well understood regulatory framework for advice.
- A range of channels through which consumers are able to access advice and guidance, including in the workplace, and appropriate flexibility in the way consumers are able to pay for advice.
Cameron says fact sheets for employees clarifying guidance versus advice will lessen the advice gap, but further and simpler explanation is needed.
Young adds: “There’s little in the proposals that will attract people into giving or staying in financial advice because it’s not clear which way the FCA is even approaching the advice gap and, as a result, nothing has happened. We’ve all heard very little on actual progress for a while.
“Demand for advice is going up and supply is staying the same or perhaps creeping up so prices will rise higher – I don’t see anything in FAMR looking to address that.”
Personal Finance Society chief executive Keith Richards says the increase in demand is making it difficult to keep costs low and close the gap.
He says: “Increased transparency as a result of RDR has been better received by the public than many predicted, and demand for professional advice has increased year-on-year since implementation.
Forming a view on whether or not the advice gap has closed depends on what you view as financial advice. Robo-advice services are a great addition to the market and allow a lot more people to invest cheaply. However, actual access to financial planning still isn’t any easier because people simply don’t have the resources to pay for it, and they are also often the people who need it most. The cost of advice is coming down as we find new ways to work with clients and investors and make sure people get the right service for the money. In the past it was about providing a service but now, as that’s having to be catered to exactly what clients want and need, there will just be more appropriate price points.
“While any effective solution to reverse the advice gap needs to be multifaceted, given the various contributory factors, success will largely depend upon the extent to which it meets the varying needs of consumers, as well as those predominantly within the advice profession.”
Adviser respondents to a National Savings & Investments survey earlier this month say they are prepared to advise clients with pots under £50,000 as they try to close the gap.
Seventy per cent say they are willing to offer advice on small investment portfolios, believing it actively supports a savings culture.
However, the figures came under criticism from Ascot Lloyd chief executive, Nigel Stockton, who says “firms were kidding themselves” believing they could make ends meet using expensive resources on low-cost clients.
Richards says: “Cost and regulatory treatment must be aligned to work in favour of consumers seeking focused or entry-level advice because it is possible to collect the cost of simple ‘basic’ advice from transparent annual charges within a basic product range.”
One step forward, two steps back
The regulator did establish its Advice Unit in response to the FAMR recommendation that the FCA should set up a dedicated team to help firms developing mass-market automated advice and discretionary investment management models.
The FCA announced at the same time it would delay the post-implementation review of RDR, rolling it into when it revisits FAMR.
Since the establishment of the Advice Unit, the Treasury says 22 firms looking to bring new propositions to market had received support.
A Treasury spokesman says: “Both the government and FCA have now implemented all the recommendations made to them, barring the review of outcomes due in 2019.”
The good intentions of FAMR may no longer have the full attention of the regulator when placed next to other challenges that will have more tangible impacts such as Mifid II, Priips, and GDPR.
Consultant Malcolm Kerr says: “FAMR had all the right characteristics, but unlike other regulation, we haven’t really seen anything [come through].
“The pressure on small IFA firms is significant and the intentions of Mifid and Priips are fine but it’s absolute overkill. The more you place on consumers, the more they will struggle. Less needed to be more here.”
I don’t see there being an advice gap, rather an affordability gap. People can go online and search for whatever financial assistance they need and find answers to most of the questions they have. There is also the Money Advice Service. These great services are not available in other countries, yet we create myths to perpetuate vested interests. Here, very few people are in need of complex or detailed financial planning. They need simple products. I have personally never said no to someone seeking help, yet many have said no to me based on price, and life goes on. For advisers who get too caught up in regulation and politics, FAMR is a major issue, but less so for advisers who are just getting on with their jobs.
Young says: “The advice gap today is much wider than it was when FAMR was conceived. The FCA are using massive resources to try and get a hold of de-risking across the whole market, as well as the advice gap, which is widening exponentially.”
The additional pressure of Brexit adds to the list of regulatory issues that may be taking up resources which could have added weight to FAMR.
Kerr says: “The amount of data the FCA has to deal with is extraordinary and they are probably overwhelmed with fixing things across the market where there’s a lot of consumer detriment, where FAMR is more about trying to make things easier for getting advice.”
A source close to the FCA tells Money Marketing they think FAMR was “a simple naval-gazing exercise”.
He says: “All the regulation coming through now is nowhere near finished and ready for people anyway and what advisers want is a lot more prescription from the FCA about suitability letters, streamlined advice, what is a good fee model and so on.
“The FCA then gets accused of being prescriptive, but advisers want more examples of what good advice looks like not what bad advice looks like.”
The view that the FCA’s resources are stretched too thinly begs the question of whether FAMR can progress quickly enough to force change while its initial recommendations remain valid.
Young says: “The advice gap was previously around people not saving, but now it’s about those who have money from a defined benefit scheme, and what they do. The advice gap is larger, not necessarily because of FAMR but because of the way the market has moved, and they’re the places advice and therefore resources will be needed.”
The virtue of patience
A Treasury spokesman tells Money Marketing the FAMR recommendations still need more time to take effect, but that feedback received privately as well as publicly in the FAMR call for input was helping regulators better establish their next moves.
Kerr says that while the risk remains that too many bodies are involved in FAMR for now, the regulator was at least making progress with its feedback to responses.
He says: “The FCA are in much more of a listening mode than the FSA and I think it is slowly getting closer to the individuals and organisations giving advice rather than sitting back and waiting for things to go wrong.”
Increasingly, robo-advice propositions are being set up after receiving clarity from FAMR, but there are clear risks when depending too heavily on technology.
Richards says: “Robo-advice has a place, but it’s not an adequate solution to the advice gap, especially against a backdrop of pension freedoms and the scale of the savings crisis. Low-cost advice doesn’t necessarily mean robo-advice, as the cost of non-automated advice can be reduced if regulatory bureaucracy is similarly curtailed.”
Until the dust has settled around Mifid and GDPR, it remains likely that a review designed to take further action will take a back seat.
Young says: “I expect absolutely nothing to come from FAMR, plus the focus really is on other things like Priips, Mifid and even Brexit.
“Most people could see FAMR was never going to go anywhere and that may have suited people anyway. It’s something that probably will fizzle out and eventually disappear.”
FAMR has been successful in parts and probably the biggest success has been the better definition of advice versus guidance. But in other areas the FCA has been going through the motions with everything and I’m not sure we’re there yet. FAMR could really be off the radar for a lot of advisers with more immediate concerns such as GDPR, which is coming up very quickly.
With an area of review such as streamlined advice, for example, I’m not sure all advisers have the confidence yet that they can use it, so that has not helped massively in closing the advice gap. FAMR has certainly helped with the pension freedoms, because there is far more happening.
On the other hand, contingent charging is back in the FCA spotlight, too. One of the unfortunate consequences of RDR and moving towards adviser charging is that some people were inadvertently cut out of financial advice, so one of the elements of potentially re-introducing it is whether it will stop people who need advice getting it, save for the fact that they could have got it on a contingent charging basis.
We could look to the example of South Africa, where they have two tiers, so it is always possible for people to access advice and take it above a certain level if needs be.
Roderic Rennison is a consultant at Rennison Consulting