The announcement by Ed Balls that the Government is looking at how to create a new national financial advice service is great news for consumers and, although many IFAs will disagree vehemently with me, for the financial services industry as well.
When I was at Which?, campaigning for a national financial advice network was a key priority. We had identified a real need for a new organisation to deliver objective financial advice and complement private sector advice capacity. So I am obviously delighted that the Government has recognised the need.
A number of major forces are increasing the need for financial advice. Demographic changes and the transfer of risk from the state and employers to individuals mean that consumers are expected to use financial products to provide for retirement or to fund health and social care. Consumers face more complex choices than ever before, with 40,000 financial products on the market, not to mention the hugely complex pensions and benefits system.
There are major financial crises which consumers need help to cope with, such as the record levels of personal debt and misselling scandals. In such an environment, consumers must be financially astute and confident to make the right decisions.
Providing consumers with information about financial products is not enough, given the major legacy problems with financial literacy in the UK. Financial capability strategies are likely to take a generation to pay dividends. There is no substitute for proper advice by well-trained, trusted intermediaries.
But the problem is that the market cannot meet the need for advice on its own, nor is it fair to expect it to. The brutal reality is that there is a growing population of consumers who are not commercially viable for the industry to advise.
The number of households affected by financial exclusion is between five and eight million. Financial providers and advisers are not charities and it also seems unfair to expect consumers who are commercially viable to cross-subsidise provision of advice to unprofitable consumers. I can see no real option but to develop a national advice service using the third sector (not-for-profit organisations and charities) to complement market provision.
Why will a national financial advice service be good for industry? One of the strategic mistakes the Government and FSA have made up to now is relying on attempts to create the conditions for the industry to provide services to excluded groups.
The margins were never there and initiatives such as stakeholder pensions and basic advice on their own were never going to change that fundamental economic reality. This approach has distorted the market and distracted quality, efficient providers and advisers from serving their natural customer base. Alternative solutions are needed.
Initiatives such as the national pension savings scheme and the national financial advice service represent a recognition of a clear delineation of the boundaries of responsibility between the industry, state and third sectors which must be good news for the industry.
The industry should not fear the new advice service cannibalising their market. The forces transforming society will result in a huge increase in demand for quality advice while the new service will be aimed at a different target market. The future is bright for the adviser community if it responds to the challenges.
When consumers make poor financial decisions, the cost falls on the wider society, including the taxpayer. If the new service helps more consumers make better financial choices about crucial matters such as retirement planning, long-term care and debt planning, this will benefit the wider public interest.
I hope we can all support Otto Thoresen’s taskforce in its efforts to design a feasible national advice network. It goes without saying that the taskforce must have strong consumer representation to ensure it is configured to meet the needs of consumers. I also hope that the IFA community recognises it has a critical role to play as well by contributing its expertise so the new service is fit for purpose. This is a great opportunity if it is properly planned and resourced.
Mick McAteer is a consumer advocate.