Good financial advice is critical to promoting financial resilience and security amongst households – particularly underserved lower to medium income households which are the focus of our work at the Financial Inclusion Centre.
But claims that overregulation has created an ‘advice gap’ are wrong – or disingenuous.
The real reasons are growing numbers of consumers simply cannot afford to save and invest, or pay for for-profit advice; many consumers are ‘underserved’ because the industry is still too inefficient to meet their needs; and some firms lack the confidence to advise consumers without a ‘belt and braces’ approach to complying with regulations.
In other words, it’s all about the economics of access and distribution and business cultures, not overregulation.
So what can be done?
Firstly, the industry needs to be more efficient and bring down unit costs so it can reach more consumers.
Secondly, if it would help, the FCA should clarify the meaning of rules. But this should not extend to a ‘safe harbour’. Reducing consumer protection would just enable the industry to continue to serve those on medium to higher incomes but transfer the risk of misselling to consumers and undermine confidence in financial services, which is just being rebuilt after a litany of damaging scandals.
Well run firms with a strong internal consumer culture are less likely to design and sell toxic products, and fall foul of regulation and redress claims. But I’m still struck by how some in the financial services industry think of compliance and risk management as a burden. In other consumer industries, these functions are an integral part of safety and quality control and seen as pre-requisites for maintaining trust.
Thirdly, we should remove the confusion around the definition of advice and advisers. There is no need for spurious distinctions. Either advice is given or it isn’t, and advisers are either independent or they are sales agents.
Fourthly, there is also significant scope for technology to improve the efficiency of the supply chain and help advisers (and consumers) better understand attitudes to risk, expose biases and preferences and so on. But we do not need to reduce regulations to encourage these innovations.
Each of those interventions will contribute to closing the advice gap. But we still need a non-profit national financial advice network to provide advice and information to consumers who are not commercially viable for the for-profit financial services industry.
In some ways, this would be an advice equivalent of Nest – the collective pension scheme which has been so successful in providing a good value pension for many and real market discipline into the pensions industry. This network would complement, not replace, commercial advisers.
We would need clear boundaries and agreed protocols for governing the relationship between regulated commercial advice and non-profit advice.
There is a cost involved, of course. If a national financial advice network is to work, this would involve some form of cross subsidy either from the public purse or from the wider financial services industry.
But the cost of not creating a viable advice alternative will be greater for excluded households and wider society in the long-term.
Mick McAteer is director at the Financial Inclusion Centre