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Chris Gilchrist: The real agenda behind the advice review


Instead of being infuriated by the FCA’s request for input to the Financial Advice Market Review, I have chosen to adopt the viewpoint of a connoisseur of bureaucratic obfuscation and Sir Humphrey-style manipulation.

Sir Humphrey starts with apple pie: the objective of the review is “to look at how financial advice could work better for consumers”. Who could argue with that? Only much later does he slip in the real agenda: “The advice gap should be regarded as any situation where consumers cannot get the form of advice they want on a need they have, at a price they are prepared to pay.”

Whoa, Sir Humphrey – Economics 101! If we accepted this definition, there would be gaps everywhere: Lamborghini gaps, lobster gaps, FA Cup Final gaps. There are zillions of situations in which people cannot get what they want at a price they are prepared to pay. These are neither ‘gaps’ nor evidence of ‘market failure’. They are the result of the normal operation of economies – any kind of economy, capitalist or socialist or communist.

Near the end is another gem: “What steps should we take to ensure that competition in the advice markets and related financial services markets is not distorted?”

The presumption is that there is a “market” in financial advice that is operating somewhat normally. This despite the fact that Sir Humphrey and his gofers control almost every aspect of the provision of financial advice. That regulation imposes costs of 10-20 per cent of revenues on advice firms – far higher than the regulatory burden in any other retail sector. To the extent that there is a market in financial advice, it is the distorted creation of regulators.

Since 20 per cent is the net profit margin a service business could expect, you have to admire the way Sir Humphrey deflects the issue of whether those costs could be lowered. “Much of the regulation of advice is drawn from EU legislation. National regulators, like the FCA, may not impose lighter standards than are required by EU law.”

Brilliant. Sir Humphrey does not say to what extent the FCA imposes rules heavier than required by EU law. I am sure it is far too hard a task to compare the advice regulation systems and costs of other EU members with that of the UK. Minister, it would take years!

Now for a masterpiece of positioning: “We want to focus the review on situations where we can make the greatest difference… This will mean focusing on those areas where the complexity of decision making is greatest and advice could make the biggest difference.”

We can see where this is heading. For people with complex needs and small sums of money, should we be “sharing the costs of advice with employers, or subsidising the cost through some form of levy on the industry”? Well done, Sir Humphrey. A splendid bit of land-grabbing and empire-building. More regulation, more cost. Trebles all round!

“Consumer engagement with financial services is essential,” says Sir Humphrey. That sounds like more apple pie but it is toxic. It is not how a regulator should think. The aim of good financial regulation should be that consumers do not need to engage to be safe, just as they do not when buying food or cars. The statement is an admission of regulatory failure.

Chris Gilchrist is director of Fiveways Financial Planning



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There are 5 comments at the moment, we would love to hear your opinion too.

  1. Congratulations, Chris – a very well-written piece. But I would argue that the cost of advice – or perhaps more accurately the cost of distribution – has always been something of an elephant in the room for people without much money: it’s just that in the bad old days, from IB through to commission disclosure, the elephant was pretty much invisible.

    Now, in this more transparent age, the elephant is a good deal more visible. And arguably, he may be a bigger elephant than he used to be, too – as people become more and more responsible for their financial security, they’re faced with an increasing number of complex and critical decision.

    In these self-reliant times, a basic modus operandi which involves presenting people with hugely complex and critical decisions and then offering them one-to-one advice is never going to work. The advice will always be too expensive, no matter who is ultimately picking up the tab. There’s only one solution: to simplify products, and the large majority of the decisions relating to them, so that most people, most of the time, can get good outcomes without the need for expensive one-to-one advice.

    We can already see a big and good example of how this can work, in the area of auto-enrolled pensions. Members can expect good (maybe not great) outcomes without either taking advice, or needing to engage in making difficult decisions. Using this example as a precedent will get the FAMR a great deal further forward than continuing to look for ways to fill that “advice gap.”

    • Lucian, I agree- I have been arguing for years that we need product regulation not advice regulation. The FCA could delegate most aspects of advice regulation to the professional bodies and concentrate on the safety issue – forcing providers to create and market products that ‘do what it says on the tin.’ These would need to be simpler than most of today’s retail products, not necessarily in their construction (eg with-profits) but in their outcomes.

  2. Real Example: Potential Client, “I have been told that I need an adviser to sign a form so that I can access my £35,000 pension, do you do that” Me, investigative questions, he has a SIPP with HL and wants to transfer this pension into that. Me,” Are you a self-investor?”, reply “Yes”. Me,. “So will you now or ever want ongoing advice?” reply “No.” Me,”OK, I can review your £35,000 pension at a one-off cost of “£1,500 -£2,000, depending on the complexity”, reply, “I’m not paying that, it’s not worth it”. Me, “Ok, no problem and you know where I am if you need me.” QED; FCA, GO, Treasury, Govt in general.
    Anybody got a different approach/idea?

  3. Chris – Magnificent. It also seems to be overlooked that those in the so called advice gap perhaps don’t want financial products, don’t have the wherewithal to buy them anyway and probably need advice on debt and then perhaps some cash reserve.

    Using your analogy – would those who couldn’t afford a Cup Final ticket be subsidised by the FA?

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