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.
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.
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