The recent guidance consultation paper on simplified advice provides the industry with a partial view of how the FCA sees this working in practice. The document is valuable as much for what it does not say as for what it does. Understandably, many have pointed out there are significant gaps in the regulator’s proposals. But these should be seen as an opportunity rather than an omission, enabling the industry to put forward views on the detail of how the process should work.
The FSA often delivered detailed proposals even at the initial consultation stage, effectively deciding in advance what it was going to do and giving only limited opportunity for the industry to contribute. The more collegiate approach from the FCA is welcome.
The paper needs extensive responses from the industry. The rules defined will substantially control how affordable advice and guidance can be provided to consumers and it is essential to have a workable structure.
In providing responses it will be crucial to identify areas where it is believed more detail is necessary. We must be clear where the gaps are and in what ways they can be filled. One of the crucial issues to address will be interaction with suitability requirements.
To produce products that are suitable, even in a simplified process it is crucial to know the customer’s understanding, tolerance and capacity for risk. All too often customers take more risk than they are happy with because they are not prepared to commit to the level of savings necessary to achieve their investment goals.
The regulatory process does not identify what to do when the consumer is being unrealistic, greedy or stupid. All too often, consumers seek products that offer spectacular returns for virtually no risk, so providing for their retirement without interrupting their lifestyle.
This is partly a matter of human nature but it is also worth noting behavioural analysis shows consumers do not feel they are achieving the same value when they invest money to produce benefits beyond a certain point in the future – they consider this to be like giving money to someone else rather than recognising they are investing in their future selves. Technically, this is known as hyperbolic discounting.
Historically, it was often thought that, in getting a customer to save, anything was better than nothing. At least if they started the savings journey this could encourage good behaviour and increases in regular savings could be added subsequently. Unfortunately, such increases rarely took place, leaving the consumer with inadequate provision and the adviser with a potential Financial Ombudsman Service risk. Ironically, it could be argued the auto-enrolment contribution levels are a further example of this; even at the highest planned level they will not deliver adequate retirement provision.
One solution could be for the fund management industry to have to quote performance in terms of real returns, rather than gross. Pure generic financial planning should clearly define a client’s goals and identify the levels of saving and real return needed to achieve these. An adviser might take this approach, but it could be that the marketing information provided to them by fund groups fails to clearly identify this important measure.
21st century consumers undoubtedly have a more realistic grasp of primary economic reality but as an industry we tend to shy away from telling them they simply are not saving enough for their future. The price we pay for not being candid about this is unrealistic consumer expectations and dissatisfaction when results are not what was hoped for.
Advisers need to be supported by a regulatory framework with an explicit definition of the contributions and real returns needed, to improve consumer clarity and reduce unrealistic expectations. In providing such a framework for a simplified advice process we need to recognise the failings in the previous processes, with the above just one example.
Ian McKenna is director of the Finance & Technology Research Centre