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Whitewash: FAMR fails on adviser liabilities but paves the way for bank advice comeback

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It was billed as RDR Mark II, but the FCA and the Government’s flagship advice review has been attacked for failing to tackle the biggest hurdle to mass-market advice – the issue of future liabilities.

The long-awaited Financial Advice Market Review was published this week with headline recommendations including redefining advice, extending adviser charging and reform of the Financial Services Compensation Scheme.

Yet critics have hit out at the lack of material reform. There are also question marks over the review’s priorities, with follow-up consultation not due until 2017.

However, the report is being seen as the Government rolling out the red carpet in a bid to tempt banks back into the sector to help bridge the advice gap.

Not with a bang, but a whimper

When the FAMR was launched by the FCA and the Treasury in August it aimed to boost access to affordable advice and guidance. The final report produced 28 recommendations – most of which involve further consultation. FCA chief executive Tracey McDermott says the regulator is keen to tackle confusion around the definition of advice, which it plans to align with Mifid II by linking to a personal recommendation.

She says: “A lot of the things that firms tell us they can’t do we actually think they can do, so we want to make our rules clearer.

“This is more about saying there are existing ways to give streamlined advice, for example.

“There will be some areas where there might be changes, but we are also looking at how we make the existing rules work better and we recognise that means we need to give more guidance to firms about how to make this work.”

The review concedes the introduction of “simplified”, “focused” and “basic” advice have “not provided sufficient regulatory clarity”. Yet it recommends introducing a new, overarching “streamlined advice” category to cover anything that is not whole-of-market advice.

This new category could be used to help a grandparent invest a lump sum for their newborn grandchild’s education, the FAMR suggests, or a 24-year-old deciding whether to save or invest to fund a first deposit.

Treasury director general of financial services Charles Roxburgh says: “We want to get to a much simpler world where we are not requiring consumers to work out ‘what sort of advice is this?’ and ‘what sort of protections do I get?’.”

But Personal Finance Society chief executive Keith Richards says: “There’s nothing stopping you in the Cobs rulebook from developing simplified advice. What the regulator seems to miss is it’s the fear a future thematic review will find any simplification significantly wanting. It’s all about certainty of future treatment.

“In the US as long as you do the right thing at inception that’s it, that’s where the liability finishes. So the uncertainty that somebody says ‘I don’t feel I had enough information to make a decision’ doesn’t wash.”

The review rejected the idea of a long-stop as it found few complaints were from more than 15 years ago.

However, it does want the Financial Ombudsman Service to improve communication, including best practice roundtables and publishing uphold rates on different products. It also suggests reviewing how well the professional indemnity insurance market is serving advisers.

But Richards says: “It is the risk associated with not doing enough that drives behaviour. You can  understand the regulator’s frustration, but it does not tell the sector how little they need to do. It has led to a culture of belt and braces because that gives more certainty.”

Aviva and Zurich are also concerned the review has not addressed the fundamental issue of liability.

Zurich campaigned for the doomed long-stop while an Aviva spokesman says: “The development of frameworks and guidance around streamlined advice is potentially helpful, but without changes to the rules governing liability it is not yet clear how much impact this will have on the availability of simple advice services for the mass market.”

Pension experts were also disappointed by announcements that will allow savers to access around £500 from pension savings to pay for advice.

Currently the function is underused and limited to paying for advice on the fund where the fees are taken from.

Hargreaves Lansdown head of pensions research Tom McPhail says: “In theory you can do this today but a lot of providers struggle to do it for an existing contract. The FAMR is saying you should be able to do this and it should be common practice.”

Aegon regulatory strategy director Steven Cameron also hits out at the regulator’s timeline.

He says: “Some of the items the review will only begin to look at in 2017 could be prioritised and brought forward. Consulting on guidance to support firms offering guidance is down for early 2017 but we could be consulting sooner.”

Return of the banks

While critics warn the review will do little to help advisers, the FCA and the Treasury appear to have done enough to tempt banks back to the market.

In addition to introducing streamlined advice, the key development is a move to extend the deadline for trainee advisers to become qualified.

The review recommends giving staff four years, up from 30 months currently, to become fully qualified to advise without supervision.

Intrinsic chief executive Richard Freeman, who sat on the FAMR’s expert panel, says: “If what they are suggesting comes to pass I suspect the banks will come back. We have been talking closely to Santander and they will definitely come back – they see this as their route in.”

The British Bankers Association says the review will help make it easier for banks to help consumers make informed decisions.

But Pinsent Masons senior associate Michael Ruck thinks differently.

He says: “I don’t think it will be enough on its own to bring in those big businesses that had doubts last week. There are a few incentives here but there are other issues at play which involve things like regulatory engagement and support, and the suspicion there may still be later  action in areas the FCA is willing to sign off on today.”

At-a-glance – the key FAMR proposals

  • Allow savers to access a portion of their pension early to pay for regulated advice pre-retirement
  • Create a new “steamlined advice” category
  • Give new recruits four years – up from 30 months currently – to train as fully qualified advisers without supervision
  • New guidance for firms offering information services without a personal recommendation
  • Explore ways to improve existing £150 income tax and NI exemption for employer-arranged advice on pensions
  • Review FSCS funding model and explore introducing risk-based levies.

Adviser views

Nick Bamford, executive director, Informed Choice

Does this change anything? Changing the definition of advice, maybe reviewing how the FSCS works and using your pension to pay for your advice. Am I missing something? Every time there is a chance to do something radical and really shake up how people do things, it is missed. We want something radical, this is a consultation basically saying nothing.

Alan Lakey, senior partner, Highclere Financial Services

The most obvious thing the FAMR misses is they still do not get the fact the more people advisers talk to, the more products are purchased. And the more advisers are able to speak to clients, rather than dealing with paperwork, the better. But it is the horrible compliance and regulation aspects that inhibit us, and this does nothing to address that.

Scott Gallacher, director, Rowley Turton

The FCA’s reasoning over not introducing a long-stop is twisted. By the same logic the FCA are saying that if advisers only had a higher number of complaints over 15 years old, then  they would have considered the long-stop appropriate. It is the classic Catch-22 situation.

Expert view

Anyone who thinks the Financial Advice Market Review was to address issues faced by advisers dealing with their current wealthy client base has not understood the project. The FAMR is about providing advice to those who, post-RDR, and arguably before, could not access or afford it.

While much industry reaction has been negative, viewed with its objectives in mind, the executive summary puts forward a positive framework for change. It offers the potential for vibrant new sectors of the financial advice community. The document is far from perfect, but given the timescale and the extent of change needed, is this surprising?

The detail contains too much old-style regulatory thinking and a lack of clarity on key points. That said, we should work with the Treasury and the FCA to help them recognise that to deliver the new environment they desire they are going to have to work differently, not just talk about it.

The biggest winners appear to be those designing automated advice services and employee benefits/corporate advice firms. Traditional advice firms with established customer bases should be well placed to deliver new services.  This Government’s pension reforms are delivering a boom time to adviser firms. The FAMR lays foundations for them to invest in their future by building new low-cost services to expand their audience.

Perhaps I see things slightly differently, after spending most of the past three months building business cases for new profitable FAMR-type advice services, but the FAMR is broadly positive.

Industry response to the report may significantly impact on our relationship with the Government for many years. Like it or not, this is the most substantial attempt to stimulate the growth of  advice, albeit not necessarily traditional advice, in 30 years. It is designed to reduce exclusion from the advice process and offers a huge opportunity for firms to grow.

The Government does not want to hear the FAMR is wrong, it wants the industry to engage with it. By delivering on extending the reach of advice it will put us in the best position to lobby for change. Just as it is argued it is better to be in the EU trying to drive the direction of change than on the outside without a voice, so with the FAMR, those who participate will have the best chance of being heard.

Ian McKenna is director of the Finance & Technology Research Centre

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. We have an opportunity to have our say on EU rules which hinder us and confuse clients.
    The lack of a long stop – while grossly unfair and iniquitous – is a red herring and I doubt very much stops people entering the market place. The FSCS and PII issue is worrying and I doubt it will lead to lower costs or charges to my pay packet ever so often as salaried regulators feel fit. One issue overlooked in all of this is the issue of independence and how it fits into the proposed new world we are entering given that a big issue was made of it in the RDR. Banks are not independent and I think this has been conveniently overlooked by the panel especially given its makeup and the influence of major players.
    How much time do we spend demonstrating and proving our independence and now it appears to be of little value.

    • Sorry Sam, I have to disagree as whilst the number affected by lack of Longstop directly may be small, it’s effect on how businesses have to protect themselves is profound, The longstop is a basic and indicative of the quango based system. Change that and we can perhaps move forward on other issues and the FCAs continied refusal and the Catch 22 lunacy of their pathetic justification for their decision is very telling as the the lack of ethics of those we have to deal with at the F-pack senior levels.

    • We do indeed have an opportunity to have our say on EU rules. I have no doubt that in a meeting of the FCA Board, one finds rather more Remainiacs than at a meeting of IFAs. EU membership is a central presumption of the regulating classes, and it will be good to have a shot at it.
      But EU or not, this isn’t an excuse to have FOS out of control like this. Its pertinent to look at the FAMR consultation responses that have been published. I counted 512 uses of the term ‘FOS’ with most of the industry telling the review that FOS procedures and role were the problem (inc. it ignoring the long-stop). That they do not address these concerns in their Report, let alone act on them, is breath-taking arrogance.

  2. While we need the public to be protected from nefarious and outrageous activities, we have reached the stage when it is regulation itself that prevents wider access to advice and financial products.

    The history of the fines levied and the history of the FOS ensures that those firms who wish to be ‘good’ are overburdened with the demands of compliance, which in may firms is ‘gold plated’. While at the same time the cowboys burden the good through the FSCS.

    From a consumer point, not nearly enough is done to facilitate experienced or skilled investors from getting on and doing it themselves. (I speak from my newfound experience!)

    Overall, we have a regime that automatically assumes that every customer is brain dead and that taking responsibility for one’s own actions is not to be countenanced.

    It is evident from a grass roots perspective that those formulating the rules have scant experience of being consumers. (Why would they when they have their DB pensions and other benefits). I would have thought that instead of reviewing the retail sector they should have started with a serious root and branch review of their own function and how it impinges on take-up with and access to financial advice and transactions.

  3. @ Harry Katz

    Whoa, Harry, we agree on something!

    Regulation and the view that it solves problems, rather than the blunt reality that it actually creates them, is the main reason that financial services has gone down the pan.

    It is also the prime reason that there are advice/distribution gaps which gape wider every day

  4. Harry, you certainly get my vote! You have summed it up perfectly. From my point of view though there appears nothing we can ever do about regulation. It has to create its own food. It has to find things to fix, whether broken or otherwise. It would only ever be truly successful if it was no longer needed. After nearly 30 years of financial services regulation, the rules are ever more complex and unworkable. The cost is extraordinary and the benefits questionable at best.

    The unelected regulator has the power to impose rules on us without account. The evidence of the RDR is damning. The regulator was told over and over again about the potential consequences of the RDR, but they ignored the warnings from, of course, the very people they consider to be the enemy. Remember, be afraid, be very afraid.

    Even the selection of the constituents of the committee for the FAMR beggars belief. But just as the upwards only ratchet of cost, complexity and empire has built the regulatory environment we have today, so too has our moaning and groaning about it without any real and meaningful effect. It seems to me that the only benefit of our venting is to avoid excessive psychiatric bills for bottling it all up.

  5. Its all about control and perception……When I take my dog for a walk in a public place he is on a lead, this gives passers by the perception he is under control, the fact my dog is well trained (like the vast majority of others) and would not harm others, and I am a responsible owner (yes with poo bags) makes no difference.

    Now IMHO the regulator and treasury follow the same methodology, by controlling the Financial services industry gives the perception to the consumer they are safe, however the powers that be believe all those who work in the FS industry is a disobedient and vicious mutt, so the leash is tightened round our neck so much its difficult to catch one’s breath or function to any degree.

    The FAMR was always going to be a white wash other than throwing a few training treats (following the dog metaphor) things will stay the same if not, be tightened even more,

    I allow my dog the freedom to be himself, yes he has rules and boundaries, but ultimately he is a pleasure a “nice to have” I trust him, we work together, this is where we are at opposite poles……. the FCA being a irresponsible owner, we are allowed no such quarter and like any abused animal they snap or just submit into a quivering mess while the real perpetrators defecate where they like and run free to cause havoc

    And the final question; if the dog is bad, is it the dog or the owner ?

    Maybe, it is the FCA that gets the industry it deserves ?

  6. “The Government does not want to hear the FAMR is wrong, it wants the industry to engage with it”. And there’s the nub of it. Even if it IS wrong, the government doesn’t want anyone to say so.

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