Non-advised business models will be in the crosshairs of politicians and regulators no matter the outcome of this week’s general election, Money Marketing understands.
Ros Altmann – who is to be made a Conservative peer and appointed minister for consumer protection if the Tories form a Government – says she will explore banning commission entirely.
The Labour Party is also considering commission on non-advised sales as part of its ongoing review of retirement products, led by Pensions Institute director David Blake, Money Marketing understands.
At the same time, European investment rules due to take effect in 2017 could add new hurdles for firms providing non-advised services to jump over.
The coalition’s pension reforms mean thousands of people who would have previously bought an annuity will instead remain invested in products such as drawdown. Many will either not be able to afford or be prepared to pay for an adviser to help manage their investments into retirement.
Firms running non-advised business may find extra consumer protection introduced by Europe could steer customers away from self-serving.
So, would blocking commission on non-advised sales push more people towards advice, or will a ban bring unintended consequences? And could the FCA’s interpretation of European regulations mean the flow of people entering drawdown without an adviser is slowed?
Commission: The root of all evil?
If the Conservatives form a Government after this week’s elections, Altmann will be made a minister with a broad remit of consumer protection and financial education.
She will immediately begin a review of the areas she thinks leave customers most at risk, including whether a charge cap should be imposed on pension products, and extending the role of Pension Wise to pre-retirement guidance.
Another priority will be extending the ban on commission introduced by the RDR to non-advised services.
Altmann says “commission is the root of all evil” as it “drives the wrong customer outcomes with the wrong incentives”.
She says the FCA was right to bar advisers from receiving commission but by not banning it entirely the regulator has created a system where non-advised sales look better value.
She says: “The RDR has been an absolute disaster for financial advisers and customers. Advisers have managed to get to the point where they can serve the wealthy very well, but the majority of pension and long-term savers have been disenfranchised in the process.
“Rightly, the regulator recognised commission was a big problem in the advice industry and they banned commission from advice but they left it for these non-advised services. Which doubly disadvantages advisers. They have to get across the message that advice has value and that you have to pay for it, but it’s left the market open to people who can hide commission at the back end.”
Even if the Conservatives are out of office in the next parliament, the issue of an uneven playing field between advice and non-advice looks certain to be on the Government’s agenda.
Labour’s review of pension products led by Blake – which closed in February and is due to report in the summer – is also expected to address the issue.
Blake would not confirm non-advised sales were formally part of the review but says: “This is part of the wider issue of hidden costs and charges that do so much to reduce the effective return that customers receive from their pension products.”
He adds: “If people think annuities are poor value, they are going to be shocked by the hidden charges in some drawdown products, especially if they involve income and capital guarantees.”
The FCA made passing reference to the relative costs of purchasing an annuity through the different approaches in its retirement income market study, published in March this year.
It concluded: “We noted that in certain circumstances (depending on the commission rates charged), the costs of purchasing through both services can be equivalent”, adding “it is a broader issue that we are giving further consideration”.
Fidelity Worldwide Investment retirement director Alan Higham has long called for the “regulatory bias” between advice and non-advice to be removed.
He says the regulator – at the time the FSA – was wrong to think customers understood the difference between pricing structures.
He says: “The FSA felt the distinction between being charged for advice and non-advice were clear enough for consumers to understand. I respectfully disagree.
“There have been ample opportunities for the FCA to say the decision was made by the previous regulator. They could test whether customers understand the difference between the two and whether they’ve made informed choices. “
An FCA spokeswoman says: “In the original RDR CP, we said the ban on commission was designed to tackle the potential for commission to advisers to bias or distort advice. It was not clear that there would be a case to apply the same approach to non-advised business.”
Higham adds that while the discrepancy may be less important in the future as annuity sales dry up, annuity brokers may begin moving into the drawdown market.
Dean says: “The firms that used to harvest email details and push you towards an annuity broker and received introduction fees for doing so, will they now receive fees for introducing drawdown customers? I suspect they will.”
Will customers benefit from removing commission?
While there is growing support for the regulator to act, firms offering non-advised service have hit back.
Hargreaves Lansdown head of pension research Tom McPhail warns a clampdown on brokers could inadvertently hit people with small pension pots.
He says: “I’m concerned that Ros has an ideological blind spot when it comes to annuities. You’d have to think quite carefully about why you were doing it and what effect it would have. Annuity brokers provide a vital and valuable service helping investors, particularly those with smaller pots, to shop around for and then purchase the best deal to meet their personal requirements.
“FCA regulations already require full commission disclosure so it isn’t clear what benefit there would be from banning commission except potentially to disenfranchise those with small pension pots.”
Likewise, Age Partnership head of retirement strategy James Dean thinks that calls to remove commission are out of date.
He says: “Commission in the old days was hidden away and clients thought they were getting something for free, but that’s now an old fashioned view for firms that do non-advised services.
“For example, when we do a non-advised sale we ensure that before anyone signs up with anything, that they are completely aware of all the revenue that we would earn from that, whether it’s fee-based or commission-based. Not just in percentage terms, but pounds and pence. And we never use the word ‘free’.”
Dean adds that regardless of a fee or commission-based model, “fiscally, it’s pretty much the same thing”.
But he concedes that remuneration would not be set by providers and so a ban would remove “commission bias”, where one provider pays more than another.
However, he refutes the claim that people think non-advised sales are free and thinks a ban would not necessarily lead to more people taking advice.
Dean says: “People might not necessarily think things are free but they might perceive that a non-advice service is cheaper than advice. In some cases it can be similar, but as long as people are aware they could have chosen advice and that a non-advice transaction isn’t free, people should be allowed to make their own choices. They don’t always avoid advice because of cost, they might just know what they want.”
The risk from Europe
In addition to potentially losing commission, non-advised services are also under threat from Europe.
The second incarnation of the European Commission’s markets in financial instruments directive is set to take effect from 3 January 2017 and is expected to drastically tighten the definition of complex and non-complex investments.
Although the scope of Mifid II does not extend to insurance-based investments and pensions, the FCA says these products are substitutable and will apply the rules to them.
According to the regulator’s discussion paper on Mifid II, published in March, the Commission is “likely to significantly reduce the types of products that can be considered non-complex”.
This means few investments and products other than “plain vanilla” shares and bonds, (non-structured) UCITS funds and some structured deposits will be able to be sold without an appropriateness test.
Firms offering complex products must already perform appropriateness tests – an assessment of knowledge, experience and wealth – before selling to customers but under the proposals, are likely to have to test far more people.
In expectation of growing demand from the mass market, some providers – such as Scottish Widows – have launched non-advised drawdown options.
While drawdown is not an investment itself, underlying funds could still be caught by Mifid II, say experts.
Investment Association retail distribution senior adviser Mike Gould says asset managers may find the multi-asset funds typically used for new drawdown propositions will be considered complex.
He says: “It becomes an issue because many of those multi-asset funds are non-ucits retail schemes, or Nurs funds.
“It looks like under Mifid proposals Nurs funds will be branded as complex and it means you can’t buy them execution-only. You’d either have to go to an adviser or there’s the appropriateness test route.”
Gould adds although investors can proceed despite failing an appropriateness test, providers will be concerned customers are put off by warnings.
Zurich principal for government and industry affairs Matthew Connell says his firm uses the appropriateness test for one of its products and that the questions are “quite onerous and stern to make sure people understand they should take advice”.
He thinks the tests could be bound up with providers’ new second line of defence requirements, which require them to give tailored risk warnings to non-advised customers attempting to access their pensions.
He adds: “The concern is once these tests are put in, every time the legislation is reviewed are we going to see them bunging in a few more prescriptions and questions until the customer has to sit through a two hour process before they can get their products?”
Last year, the FCA signalled it would be scrutinising sales of non-advised drawdown and UFPLS following the introduction of the pension freedoms.
A spokeswoman says: “While the full scope of the study if yet to be finalised, one area of interest we have highlighted is looking at how firms support consumers in choosing products that are suitable for their circumstances.
In addition, the regulator is to update rules on how drawdown investments are communicated to consumers. It says current projection models detailing how funds could grow risk producing “confusing or irrelevant information”.
Hargreaves’ McPhail says: “There’s never any sense of complacency around the regulatory treatment of financial products. We’ve been doing non-advised drawdown for the best part of ten years now so we, more than any other business, are very mindful of the risks and complexities of delivering these kinds of products safely to customers. And if the regulators change the rules of the game, we will adapt accordingly.”
Stefan Fura, director, Furnley House
I would support a broader ban on commission as it would level the playing field between advice and non-advice. With annuities there’s a danger it becomes all about the best rate and so people think if I can get it done myself and, as they think, not pay for it, then they believe they’re getting the best rate. But the value of advice is having that person who can explain to you the right shape of a product, or if that product is even right for you. Having to charge a fee and be explicit means the companies will have to be a lot clear about what they are and are not doing. If it’s just a case of finding the best product, that promotes taking advice as opposed to an online comparison engine.
Rob Reid, managing director, Syndaxi Chartered Financial Planners
The public perception is it must be cheaper because you’re not giving advice. It’s an inevitability that commission will die off, it’s not if, it’s when. If you’re going to allow people to make proper comparisons you can’t have one crowd able to do one thing, and the other lot being able to do another. We need sensible dialogue on this. You get less of a service and you pay more money, it just seems people are being taken advantage of.
Alan Higham, retirement director, Fidelity Worldwide Investment
A reliable, expert recommendation on what to do with your retirement savings should be a safe harbour for every retiree who is unsure what to do with their new found pension freedoms.
Rightly, the regulator insisted on changes to make sure professional advice was, well more professional than in the past, and insisted on proper qualifications and continuing professional development for advisers. Even better was the insistence that advice charges were to be made explicit in £ terms in an attempt to divorce financial advice from product sales and the risks of bias that go with it.
However, regulations still allow all the bad points that used to blight advice many years ago to persist where annuities were sold without a professional recommendation. People without qualifications could pontificate as though they were experts; information and guidance could be provided without any responsibility attaching to the buying decisions suggested to people and what’s more this service was allowed to be presented as being free for the customer.
What could possibly go wrong? Quite a lot actually. The central problem is that the public generally can’t spot the difference between the fully regulated newly improved advice and the commission biased sales that were left behind called ‘non-advice’.
The regulator needs to clean up the non-advice space and a sensible start place would be to ban commission. I can’t see a justification for keeping it and unless the industry can articulate one then it surely has to go.
I have no problems with guidance being used to help people make a decision but surely it must be subject to the same basic principles that advice regimes operate under? Explicit charges presented up front to the customer for agreement and some minimum professional standards to ensure adequate quality.
Ros Altmann is right to question the rules around non-advised services at retirement. We need an independent, expert review of the regulations in this thorny area to ensure that the consumer receives the right level of expert help and advice in making crucial, often irrevocable, decisions at retirement.