The FCA’s attempt to bridge the “advice gap” is the single biggest risk to the UK’s retail financial services industry. Early indications are it will result in a “back to the future” fudge in which the banks and insurers are allowed to use a simplified advice process to sell simple products.
A few years ago, then regulator the FSA used to crow about how European regulators were following in its steps by regulating advice and limiting the loot-and-pillage commission-driven sales practices of banks.
Now EU rules governing advice (largely following the UK model) mean incorporating an “advice charge” into products – which is what the banks will demand as their price for entering the market to loot-and-pillage (sorry, service) people who cannot actually afford advice – will require weaselly redefinitions that undermine the principles of RDR.
The regulator’s thinking was and is wrong. For a mass retail market, advice cannot be regulated effectively. It is products that must be regulated. Only if you accept this can you move towards the right sort of product regulation.
Advice really is not the main issue and pretending it is will result in weak product regulation and make costly failures inevitable. But having sold advice regulation to the eurocrats and had it adopted as part of EU regulations, the FCA cannot very well now complain about those rules. So the FCA can only fudge its way into product regulation. It is starting from the wrong place.
As a result of the Financial Advice Market Review, regulators have realised they can only create a dumbo advice regime (sorry, I really cannot think of a better term for limited-scope advice by lowly-qualified people) if they specify the dumbo products to which the advice is confined. They are doing this partly because they are under the cosh from the Treasury and legislators, which have belatedly realised they have created a top-heavy and ineffective bureaucracy.
Because those in top regulatory positions during the last product disasters (remember low-cost endowments and Equitable Life?) have long since retired, the regulator is ready to repeat its old mistakes. Allowing dumbo products to be created outside the authorised fund regime carries risks of similar failures.
There are many ways of creating dumbo products that might appear to satisfy a regulator’s desire for low cost and simplicity but they would be poor value and – if they are outside the authorised fund regime – would provide inferior investor protection.
The only way to preserve the fiction of investor protection would be for the FCA to rely on the balance sheets of the jumbos that sell such products: the banks and insurance companies. In doing so, they would simply repeat the errors that led to the Equitable Life and low-cost endowment disasters. Now, as then, the jumbos will game the system and run rings around the regulators.
The bills for dumbo advice will surely be substantial but they will probably only arrive after today’s Treasury ministers and FCA bosses have collected their gold-plated pensions. Advisers will have to lobby hard to ensure the Financial Service Compensation Scheme levy in respect of dumbo advice sticks solely with the dumbo jumbos that provide it.
Chris Gilchrist is director of Fiveways Financial Planning