No sooner had I suggested in my previous column that the Financial Conduct Authority’s thematic review of price comparison services should be extended to include protection and investment products than the FCA announced a similar review of non-advised processes.
This is also welcome although I cannot help thinking that the best solution would be an exhaustive review of the whole advice process – advised and non-advised.
Support for such a review can also be seen in the recent statements by the Financial Services Consumer Panel following its review of the annuity market although you will have to navigate through no small amount of anti-industry rhetoric to find these observations. In the middle of its paper, the FSCP recognises that there is a “current regulatory arbitrage in which non-advice services are expanding at the expense of the professional advice market”.
We now have the regulatory regime that the consumer lobby generally, not just the FSCP, asked for. The alleged bias of commission has been removed, at least from the advised sector and, one year on, the sector has not ceased to function. There is, however, clear evidence of a growing advice gap.
I believe the question is: where do we go from here? Having achieved a regulatory environment largely of its own design, there is an argument that the consumer lobby’s cure is worse than the original problem.
In its paper, the FSCP highlights many genuine problems in the annuity market, such as the complexity of the issues that need to be addressed and the diverse range of options.
The primary challenge with many of these issues is not that there are not people capable of giving advice – although those highly qualified technical specialists are by definition expensive to employ – but that in a nation where according to the National Numeracy Campaign the numeracy level of half the population is equivalent to that of an 11-year-old, large numbers of consumers are in need of guidance as they lack the basic skills needed for the decisions they have to make.
The blame for this cannot be laid at the door of the advice market nor even the financial services industry; this is part of a wider failing in society.
As currently constituted, the RDR is failing all but the wealthiest in society. It has driven up the cost of advice overall but reduced it for those who can afford to pay. There is an urgent need for affordable ways of guiding consumers and providing services they will value at a price they can afford.
The original RDR design allowed for so-called “simplified” advice but this failed to materialise when it became clear that while the advice, process and cost might be simplified, the liabilities would not. In practice, this killed off the possibility of low-cost guidance well before the RDR was put into practice.
Any review that the FCA might conduct will only be effective if the regulator can persuade the ombudsman service to embrace whatever new processes might be designed and to match liabilities proportionately. Technology has huge potential to deliver low-cost, scalable solutions that could be ideal to fill the advice gap.
Many argue that complying with the current advice regime makes this impossible. I do not agree but undoubtedly, greater regulatory clarity would help and I believe that revisiting the need for a middle way would be valuable. At the start of this year, I thought the UK was three years behind other parts of the world in the area of digital advice. During 2013, however, I believe that we have caught up by a year and, based on services and solutions I have seen that will emerge in coming months, I think we will soon be only 18 months behind.
The question is: do we want to become a world leader in digital advice as we are in so many areas of e-commerce? I am not suggesting there should be different regulatory standards for human, hybrid or digital distribution channels. On the contrary, it is essential all are obliged to work to the same standard.
Large parts of the consumer lobby continue to press for an idealistic situation where endless amounts of free advice are provided, underwritten with a guarantee that, should world events a decade or more hence mean that the solution selected was not the best one, the adviser will pick up the cost.
As long as this remains the objective of the consumer lobby and the ombudsman, we will never achieve scalable, affordable advice for consumers.
Is it not time for consumer bodies, the ombudsman, politicians and the media to engage with regulators and the industry to define an environment that can deliver consistently good outcomes to consumers at a price they can afford and which is equally commercially viable?
By definition, this will necessitate a degree of compromise so perhaps we should aim for solutions that produce good outcomes.
The time is right: we are one year in to the RDR and there are already lessons for us to learn.
We also have a new regulator unencumbered by previous decisions.
This is perhaps a once-in-a-generation chance to set the direction of the financial advice industry. It will be tragic if idealism causes us to miss this opportunity.
Ian McKenna is director of the Finance & Technology Research Centre