Advisers have raised concerns the Treasury’s plan to redefine advice could have unintended consequences and lead to confusion around charging structures.
The new definition was put forward as part of a consultation last week. Although aimed at simplifying the advice boundary, concerns have been raised about how advisers should bill clients for work that falls outside the definition set out in the Treasury’s consultation.
While the chances may be remote, advisers are wary of a return to a commission-based charging model for services no longer deemed regulated advice. There are also concerns the product-centric nature of the definition is a step away from the holistic view of advice brought in after the RDR.
This time it’s personal
Through the consultation, which was one of the recommendations of the Financial Advice Market
Review, the Treasury wants to align the definition of regulated advice with the EU’s Mifid rules. The consultation explains there are currently two ways of defining advice. In the UK, regulated advice is def-ined as “advising on investments”, under a section of the Financial Services and Markets Act called the regulated activities order. Meanwhile, the Mifid definition is based on a firm giving a customer a personal recommendation.
The consultation proposes “to amend the wording in article 53 of the regulated activities order to reflect the text set out in Mifid, so consumers only receive ‘regulated advice’ when they are offered a personal recommendation for a specific product.”
While the paper is aiming to provide clarity, Aegon suggests confusion could result around when the FCA requires advisers to abide by the charging rules brought in with the RDR.
Aegon pensions director Steven Cameron says: “After the RDR the way that advisers could be remunerated for advice changed and they could no longer be remunerated through commission.
“Now that the definition of advice is being changed, it does beg the question of what the FCA expects in terms of paying for services no longer deemed advice.”
Cameron adds adviser charging rules currently apply to both advice with a recommendation and what the FCA refers to as “related services”. Much of the market has applied the post-RDR charging model to advice that does not result in a personal recommendation.
Cameron, along with many advisers, says he does not want to see the market take a step backwards to a commission-style system to fill a gap left by the new definition of advice.
He says: “With the tough transition away from commission now successfully achieved, we do not believe either the industry or the FCA would want to see that reversed. It would be helpful to receive early clarification from the FCA on this.”
The regulator declined to comment on how advisers would be able to charge for services that did not result in a personal product recommendation.
Advisers do already have a variety of ways to charge for non-product- related work that do not involve payments from third parties.
Yellowtail Financial Planning managing director Dennis Hall says: “If I am doing financial planning or cashflow modelling I am charging on either a fixed-fee basis or an hourly rate. I don’t have a product to offset it against in that case…Advisers have their schedule of fees and they can revert to time-costing.”
Retirement Intelligence director Billy Burrows agrees there needs to be a clearer definition between product-specific advice and advice around overall financial planning, but he does not believe the Treasury proposals will see a return to commission.
Burrows says: “Logically, the only way commission could come in is on product sales. You cannot have commission on anything that is not a product.”
“Where are the boundaries between help, guidance and advice? The trouble is, for the man on the street, it all merges into one”
Advice and guidance confusion
Commentators also used the consultation to renew calls for clarity for consumers around the difference between advice and guidance.
Barnett Waddingham senior consultant Malcolm McLean says: “My concern has been the area of confusion that seems to surround many people as to what is advice and what is guidance.
“There is basic information which a provider must provide. Guidance is applying discretion to that situation and telling the person what they could do, and advice is telling people what they should do. That would be a recommendation directed at a particular product or provider or both.”
Burrows says: “The problem is, where are the boundaries between help, guidance and advice? Providers can help their customers by answering questions and giving them information, Pension Wise can give guidance and advisers give advice. The trouble is, for the man on the street, it all merges into one.
“It is great playing around with words but it doesn’t really help solve the advice gap.”
Chevening Financial IFA director Paul Harding suggests a simple way of defining advice to help consumers: if they pay for the service and not the product, it is advice.
He says: “The Treasury is trying to come up with a definition of advice that fits the legal frame- work around financial services and makes sense in the real world to consumers. Advice is something you pay for from someone who is qualified. If you are delivering advice you should not be earning anything from a product you are recommending.”
The future of ‘advice’
A Treasury spokeswoman told Money Marketing the Government would carefully consider all the responses it received to the consultation. The FCA will also release guidance that will “complement” the definition of advice work to date, looking into firms offering services that help customers make their own investment decisions without a personal recommendation. According to the FAMR report, the regulator will consult on this guidance by early 2017.
Both the new definition of advice and where it differs from guidance will be important factors in the direction advisers and providers take with their offerings.
Apfa director general Chris Hannant says: “People have been reluctant to get involved in guidance or streamlined advice, and it is the personal recommendation boundary that gives the uncertainty.”