Tessa Norman and Natalie Holt
The FCA and the Treasury are plotting a radical overhaul to the way financial services is regulated.
If successful, the creation of a regulatory “safe harbour” would act as the gateway to product innovation and would go some way to closing the advice gap that has opened up post-RDR.
But what if policymakers get this wrong? One former regulatory boss warns the introduction of a regulatory carve-out for certain types of advice could herald a return to the “Wild West” days where huge volumes of products were sold with little thought to client suitability.
So is the FCA about to buckle under the pressure of Government and the industry lobby and roll back on the tough advice requirements it has always sought to maintain? How is this argument different from the basic and simplified advice regimes of the past? And could safe harbour rules really work in practice?
The FCA, and the FSA before it, have argued advice should always comply with the regulatory framework around personal recommendations. This means that advice, whether ‘full’ or simplified, has to be delivered by a qualified person with the firm responsible carrying the liabilities for that advice.
But the Government and FCA’s Financial Advice Market Review, announced in August, looks set to change that. One proposal in the review’s terms of reference was to create a safe for certain types of advice.
The terms did not offer any more detail on how that would work in practice, but it is thought this would mean limited or no liabilities for advisers recommending approved products or behaving according to set guidelines.
The Treasury has made its stance on a safe harbour clear. Speaking at an FCA event on robo-advice in London last week, Treasury economic secretary Harriet Baldwin said: “The fear of potentially doing something innovative that could down the road be seen as having been wrong is a key reason why it is so important to us as Government to involve the FCA in the advice review.
“What will have to come out of the review if there are to be changes is that if you follow these regulations that effectively that will be a safe space and a safe harbour for you for the rest of time.”
But the FCA’s position is harder to make out. Recently appointed advice division head Linda Woodall told a fringe meeting at the Labour party conference in Brighton last week that loosening regulatory requirements was not “the right way forward”.
Yet in the same week FCA director of strategy and competition Christopher Woolard talked about “regulatory sandboxes”, where firms can try out ideas but if products went wrong they would have to pay clients redress but would not be subject to FCA enforcement.
Personal Finance Society chief executive Keith Richards argues creating a safe harbour which would limit liabilities for firms would also help protect consumers who are going without advice because of the cost, and who may be vulnerable to firms peddling scams or unregulated investments.
He says: “The objective should be clear, we need to increase access to regulated advice and no one is suggesting a reduction in standards or quality of service, just a reduction in over-bureaucratic process, cost and unlimited liability.
“We should not forget that simplified advice’ was assumed to incorporate the use of low-cost robo-advice but because the regulatory treatment is no different from full advice, it has been a non-event.”
But others are less convinced that introducing safe harbour rules would improve outcomes for consumers.
Former FSA head of retail policy and regulatory consultant David Severn says the discussions about limiting liabilities as part of the advice review echo those he had around the basic advice regime that supported stakeholder products. He says a framework was in place to deliver stakeholder products, which was backed by the Financial Ombudsman Service. The process fell down when banks and insurers wanted less restrictions on advice but with no liability.
Severn says: “A lot of this sound like a re-run of previous arguments. [Money Marketing columnist] Nic Cicutti has recently written that he detects the hand of the Association of British Insurers in the advice review, and he is right.”
Severn doubts the motives of providers who are calling for a safe harbour, and warns it could end up hurting consumers.
He says: “Some in the industry and the Treasury are not coming at this from improving access to advice, but rather how to sell more products regardless of whether they are suitable. They are the ones who would like a return to the days of the “wild west” when some firms sold shedloads of unsuitable products to benefit themselves rather than benefit consumers.”
Severn also believes the Treasury will be alive to concerns from the financial services industry about the regulator “frustrating their business” and will look to act accordingly. He argues in any event, the FCA will be the fall guy.
He says: “Just look at what happened with pension transfers. The Government went OTT in promoting the new freedoms and then, when it all went belly up, blamed the regulator for not taking action quickly enough.”
Independent regulatory consultant Richard Hobbs believes the concept of a safe harbour cannot work in practice, and questions how a lack of liability could apply in the event of significant consumer detriment.
He says: “If the FCA appeases the Treasury on this, there would be an outcry if consumers were disadvantaged. You can bet the Treasury would double cross the regulator as quick as a flash if that were to happen.
“The rules are the rules, so what are firms seeking a safe harbour from? From breaching the rules? There is no logic to that argument and there can be no immunity from breaking the rules. Anything the FCA could do here would be a bodge. For appearance’s sake, it could come up with some wishy-washy guidance, but advisers would say that can’t work with that.”
Safe harbour realities
Some regulatory experts argue a regulatory carve-out could work, but say this would not be without its problems.
Law firm Pinsent Masons senior associate Michael Ruck suggests a safe harbour could apply to certain products. He gives the example of a client who has between £10,000 and £15,000 to invest, wanting easy access and the best returns – in that scenario the FCA could mandate that the client should choose a cash Isa, and an adviser that followed that process would have no regulatory comeback.
But he says: “This would be a significant change in direction for the regulator. If it goes ahead, where would the next safe harbour be? The Treasury and firms would push for it to happen on a wider basis.
“A safe harbour means firms can know if they tick a set of boxes, they will be OK in terms of liability. But could there be circumstances where the boxes have been ticked, but the process hasn’t been completed in the right way, and consumers still lose out?”
As well as limiting liabilities for certain products, DWF partner Harriet Quiney says safe harbours could also apply to sales processes, such as the use of decision trees.
She says this would have to be supported by maximum investment limits and some form of compensation if the decision tree process meant an unsuitable product was bought.
Quiney says: “Creating a safe harbour for the sales process could come dangerously close to inviting the FCA to risk-rate products, which it has traditionally refused to do.
“There are still risks – there could be a flaw in the decision tree that is not picked up for a number of years and by the time it is spotted, a large number of people have invested. But this is always a problem with a safe harbour. It may look like a prudent response when designed, but you can never tell exactly how it will apply until problems arise.
“I am sure that if the FCA has any major reservations about a safe harbour, it is that they might end up harbouring something undesirable by mistake.”
Philip J Milton & Company
The way regulation works, you can’t do straightforward transactions without jumping through all the regulatory hoops. It is so complicated you almost end up putting clients off investing altogether. Advisers are left vulnerable because of the constant threat of the Financial Ombudsman Service. Without the FOS’s backing, I don’t know how a safe harbour could get off the ground.
Thameside Financial Planning
It all boils down to the Financial Services Compensation Scheme, and us advisers having to pay for the bad guys. In theory, the idea of a safe harbour is sound, but in practice I don’t know if it’s workable. The distinctions between advice and non-advice are already so murky. It would be better if firms either stepped up to the plate and gave full advice with all its caveats, or went execution-only with none of the consumer protection.
Expert view: Keith Richards
It is understandable that the FCA will demonstrate caution over suggestions of “reforms to regulation” where it might appear to reduce protection for the public. However, without change the public are being increasing left to fend for themselves, vulnerable to scams or unregulated activities which afford no protection. The objective should be clear, we need to increase access to regulated advice and no one is suggesting a reduction in standards or quality of service, just a reduction in over bureaucratic process, cost and unlimited liability.
The Treasury is on the right track with the suggestion of a safe harbour which follows the Personal Finance Society’s submission to the Work and Pensions committee last month. The time has come to stop letting perfect get in the way of the good, respond to public need following significant Government reform and equally acknowledge the positive progress made by the advice sector. It is time to responsibly address the unintended consequences which are impacting consumers and the advice profession alike.
The use of technology to streamline the advice process is an obvious route to explore and there are already some good examples available. Qualified advisers with years of experience are arguably best placed to assess whether or not a client would be better served by a simplified process and should be able to implement accordingly.
Whilst we need good effective regulation, ignoring the consequences of over-regulation is simply unacceptable from a public interest perspective. It leaves the UK consumer to fend for themselves or vulnerable to the increasing levels of fraud and scams evident since the introduction of pension freedoms, which is simply appalling.
I fully support the Treasury’s focus on solutions to increase access to advice, including the use of technology which will ultimately afford greater public service and protection if approached properly. I hope more organisations, including the FCA can unite, behind delivering greater public protection by increasing advice access, rather than reducing it.
We should not forget that simplified advice was assumed to incorporate the use of low cost robo-advice but because the regulatory treatment is no different from full advice, it has been a non-event.
Keith Richards is chief executive of the Personal Finance Society
What could a safe harbour look like?
There are different models the FCA could adopt to introduce a regulatory carve-out for some types of advice, where liabilities would be limited if firms follow certain rules.This could apply to:
- Low-risk products
- Maximum investment amounts
- Decision tree sales processes
The hope would be that by relaxing the regulatory framework for advice, costs would come down and more investors would be able to access advice. Apfa director general Chris Hannant says a good example of how a safe harbour could work in practice would be insistent clients, where an adviser recommends not to do a pension transfer but the client goes ahead anyway. A safe harbour could give advisers confidence that a claim would be unlikely to be upheld if it went to the Financial Ombudsman Service.Hannant says: “The term safe harbour could be applied to a lot of different things. The question we have to ask is, ‘what are the things that undermine investment in the advice profession, and what are the biggest threats to advice businesses?’ When looked at like that, you could expand the safe harbour to things like looking at a long-stop, tackling the huge Financial Services Compensation Scheme levies, or stopping claims firms using the FOS for free.“I would be wary of anything that creates second-rate advice on the cheap. The right solution has to be the means to deliver proper advice in a cost-effective fashion.”