The PFS board and, in general, its mem-bers support the concept of adviser-charging. We firmly believe that a transparent and agreed charge for financial advice is the right way forward and, without it, the provision of financial advice will not be viewed as a profession.
However, the application of advisercharging could have unintended consequences. Clarification of the VAT rules published recently by HMRC and the Association of British Insurers has focused minds. Although the guidance has not changed the VAT rules, the reaction by advisers is evidence that few fully understand the way that VAT should be applied in the current market. Some believe that adviser-charging and how VAT is applied could have a profound impact on both the business model of advisory firms and the accessibility of professional advice for the general public.
Since the publication of the VAT guidance, some firms are splitting their services into “advising” and “arranging” and costing each separately for ease of administration. This works well where financial planning is the predominant service but, in other firms, it could mean that customers will be asked to pay VAT on the advice element of the charge, which may not be necessary as the overall service could well end up being intermediation, with the dominant service being arranging.
Two main drivers for splitting the service are not knowing in advance whether a customer needs or will buy a financial product and, second, a desire for certainty over when VAT should be applied.
In the interests of their clients, some firms may want to avoid additional costs and look for ways of structuring their service so they do not have to charge VAT.
Keeping taxable income under the VAT threshold is one way but hardly good business practice. An alternative view is that firms which want to ensure that their services are exempt will revert to a transactional business model. Consumers could be driven straight into an intermediation service, reducing the likelihood of shopping around or comparing services.
Many people seeking financial advice for the first time will have to pay a fee. The need for advice is often triggered by lifechanging experiences, such as redundancy, inheritance, marriage, divorce, change of job or occupation. In these circumstances, the fee is almost certain to attract VAT. This type of advice provides a valuable service that extends far beyond financial products. Quite often, a financial product is not even recommended. The cost of this service will increase as most firms are not currently VAT-registered. The “loss-leader” approach and cross-subsidies that are prevalent in the market today will not be viable after the RDR.
If the views I am hearing materialise, we could see a repolarisation of the advisory sector, professional fee-based advice for those that can afford it and a transactional service for everyone else – product selling by another name. I sincerely hope this does not happen as it would be a retrograde step and goes against the whole thrust of the RDR objectives.
Fay Goddard is chief executive of the Personal Finance Society