Financial Advice Market Review

Launched in August 2015 in the light of concerns that the market for financial advice was not working well for all consumers, the Financial Advice Market Review (FAMR) has finally been completed and the report was published in March 2016. Eight months of effort, lots of consultation and even more anticipation – was it worth the wait?

The stated aim of the Review was to explore … “ways in which Government, industry and regulators can take individual and collective steps to stimulate the development of a market which delivers affordable and accessible financial advice and guidance to everyone, at all stages of their lives.”

Despite the high level of anticipation, and perhaps expectation, advisers might baulk at reading the report’s 85 pages. This summary should be helpful.

Why now?
Three years since RDR; pensions flexibility; consumer distrust of financial services companies; a greater awareness of the cost of advice. These all contributed to the desire to assess the state of the financial advice market in the UK.

The review made recommendations in three key areas …

  1. Affordability – how to make advice more affordable to the mass market;
  2. Accessibility – giving consumers more information and confidence in relation to financial decisions;
  3. Liabilities and consumer redress – giving advisers more confidence regarding the FOS, and re-thinking the funding of the FSCS while at the same time maintaining consumer protection.

The review made 28 recommendations – these are summarised below – omitting the more technical suggestions relating to MiFIDII or Treasury and other consultations.

Recommendations on affordability

  • There should be a consultation on the definition of regulated advice, leaving more space for other forms of advice and guidance;
  • The FCA should provide more support to firms seeking to develop and offer services that help consumers make their own financial decisions;
  • The FCA should develop a clear framework that gives firms the confidence to provide streamlined advice on simple consumer needs;
  • The FCA should help firms to take on new trainee advisers by permitting them to work under supervision for up to four years before obtaining an appropriate qualification;
  • The FCA should consult on the cross-subsidisation rules, in order to allow firms greater flexibility in their pricing models;
  • The FCA and firms should work together to improve suitability reports, reducing their length and the time taken to produce them;
  • The FCA should help firms to develop automated advice models.

Recommendations on accessibility

  • The FCA and The Pensions Regulator should work to develop a factsheet to set out what help employers and trustees can provide on financial matters;
  • The Financial Advice Working Group (FAWG) should work with employers to develop and promote a guide to the top ten ways to “support employees’ financial health”;
  • The Treasury should explore ways to improve the existing £150 tax and NI exempt allowance for employer arranged pensions advice;
  • The Treasury should explore options to allow consumers to access a small part of their pension pot to cover pre-retirement advice;
  • The FCA should remind firms of the flexibility in the rules on adviser charging;
  • The Treasury should ‘challenge firms to create a pensions dashboard’. This is intended to be one place where consumers can see ALL their pensions;
  • The FAWG should publish a shortlist of new ways to describe ‘guidance’ and ‘advice’ to be consumer tested;
  • The FAWG should ‘lead a task force to design a set of rules of thumb and nudges’. This is intended to encourage people to engage more with financial advice at key points in their life;
  • The Treasury should assign continuing responsibility for the rules and nudges to an appropriate body.

Recommendations on liabilities / consumer redress

  • The next FCA review of FSCS funding should explore the merits, risks and practicalities of alternative approaches;
  • The FCA should consider a review of the availability of PII cover for smaller firms;
  • The FOS should consider holding regular round table discussions with industry bodies;
  • The FOS should publish more detail on its uphold rates;
  • The FOS should consider establishing a more visible central area on its website to help advisers;
  • The FCA should not introduce a long stop limitation on referring complaints to the FOS.

Further work is now planned. In particular, the FCA is due to publish the result of a survey on the provision of financial advice in April 2016.

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Our View

The review has not been well received in many quarters. We agree with the critics.

The conclusions seem to be mostly of the ‘the FCA should do’, ‘further exploration’ and ‘more consultation’ type and, frankly, a bit weak considering the effort that has been expended.

For example, the recommendation to create a list of new terms for guidance and advice seems to us to miss the point. This was already done by the regulator around the time of the RDR.

Then there is the recommendation to create a new rules and nudges quango! No comment needed.

Just about the only firm recommendation was that the FCA should not introduce a long stop limitation on complaints but the FCA had already reached that conclusion!

More fundamentally, we think there is a question mark over whether the basic premise of the review is even valid.

The principal driver for this review was to address what is commonly referred to as the ‘advice gap’. This phrase has gathered strength since the advent of the RDR – with many in the industry making doom laden claims that the banning of commission on investment products would lead to a significant number of consumers having less or no access to financial advice. Those industry pundits are now revelling in a ‘told you so’ moment. We think that view might be misplaced – does the advice gap really exist?

Going back a few years further than RDR, there was much concern about the savings gap in the UK. This was defined as the amount of money people need to save in order to maintain their lifestyle in retirement and was undoubtedly a real phenomenon, based on real data. Regrettably, the savings gap has not gone away in the interim, it has grown.

In September 2013, a Government study of UK savings rates revealed that up to 13m people were heading for a drop in living standards when they retire. This was 2m more than had been thought to be the case and represented around one third of the workforce. Auto enrolment is expected to help around 1m people bridge the gap, leaving a staggering 12m people with a problem.

Exactly one year later, True Potential and the Open University, conducted a survey of over 2000 people and found that 40% of the respondents were not currently saving towards retirement at all. Although a significant number (79%) thought pensions were poor value for money, it was an inability to save rather than a proactive choice that drove the lack of contributions – they had no spare income!

As recently as September 2015, Deloitte confirmed that the savings gap is getting bigger. They project that the gap could hit between £350bn and £374bn by 2050, a 9% increase over what they estimated as recently as 2010. It is easier to understand the significance of these huge numbers when you consider that this means that UK savers will, on average, have to save £10,000 more each year to retirement to close the gap. That’s a big ask for most of the population.

The reasons for the savings gap increasing are complex and partly due to increasing costs of retirement – health care, long term care, a growing (and aging) population straining the ability of public funds to keep up. But when we look at the other side of the equation, namely what is stopping people saving more, the reasons include –

  • Lack of spare income;
  • Levels of personal debt;
  • Low interest rates providing little incentive to save;
  • And not least, a lack of faith in financial institutions and products – especially since the Banking crisis and mis-selling scandals in recent years. A point that was confirmed by the FAMR in its investigations.

But here’s the thing! Nowhere, in the studies mentioned above or elsewhere, is the savings gap attributed to the inability to access financial advice.

Are there too few advisers?
Although many advisers and firms did disappear around the time of the RDR, there is no evidence that there is a physical shortage of advisers. Research by Towers Watson on behalf of the regulator found that there was a demand for around 25,000 advisers yet a total of 30,000 advisers active in the market. The FCA concluded that “There is ‘little evidence’ that the retail distribution review (RDR) has caused an ‘advice gap’ …”. The regulator went on to state, “… the RDR had revealed the true cost of advice and that in some instances ‘has led some consumers to consider the extent to which the advice they receive represents value for money. This is not necessarily a bad thing. For many consumers, the decision that advice is not worth paying for at true cost may be the right one …”

Demand for advice might well have increased since the mandatory requirement for advice on transfer values exceeding £30,000, and not all advisers are qualified to give such advice. However, there is no evidence that people cannot find an adviser when they wish to use one. The problem seems to be more that many people do not wish to use an adviser.

There are probably four types of consumer who do not access financial advice –

  • The DIY consumer
    … these people invest on their own behalf, perhaps typified by the customer base of D2C firms such as Hargreaves Lansdown and Nutmeg. There is no advice gap here.
  • Advice is not good value
    … these consumers think that financial advice is too expensive in relation to its perceived value and choose not to seek advice. There is no advice gap here, just a personal choice. But there is an opportunity for firms to reach out to and persuade these people of the real value of advice.
  • Cost is disproportionate
    … those for whom the cost of advice is disproportionate to the level of their investment or savings. There is no advice gap here – it is an entirely rational and correct decision not to take advice. But there is an opportunity for firms to create a level of service that would be proportionate to the needs of these consumers.
  • Cannot afford the costs
    … those who genuinely cannot afford to pay for advice – and probably have little in the way of finances that requires advice and have no spare income to save.

It is undoubtedly true that some of those consumers in the last three of these categories would have engaged with ‘advisers’ in the pre-RDR world but, in reality, they were often sold a product rather than advised. And many of those products that paid sufficient commission to warrant the adviser’s / salesperson’s efforts were high charging to the extent that those same consumers are no longer able or willing to pay the same ballpark amount now that it is out in the open, instead of obscured by the ‘My commission is paid by the provider, and does not come out of your investment Mr Client, honest!’ type of conversation that was not uncommon pre-RDR.

It used to be accepted wisdom in the industry that life insurance was sold not bought and that probably had a grain of truth. However, the related mindset that it was better for consumers to be sold a poor value or unsuitable savings plan rather than have no savings at all was always much more difficult to justify. Especially in light of the number of such plans that were surrendered early leading to the consumers suffering heavy penalties and loss of money. The data on persistency rates warrants an entire article but, alongside a whole variety of data, the FCA report on persistency published in January 2013 included these telling figures …

Proportion of personal pension plans still in force after four years …

Sold by company representatives – 45.1%

And just in case IFAs reading this start to feel superior, the figure for plans sold by IFAs was 45.3%!

So, there is definitely a savings gap, but maybe what is constantly referred to as an advice gap is really a sales gap. If so, then the FAMR might be tilting at windmills!

Action Required By You

This is mainly for information only but you might care to read the whole FAMR report. The conclusions seem to be mostly ‘the FCA should do’ and ‘more consultation’ so, for now, it is pretty much a case of watch this space.

Meantime, although we think the whole premise for the review, namely addressing the advice gap, is open to question, those firms that are concerned about this could consider three options …

  • Could you offer simplified advice around simple consumer needs?
  • Is robo-advice of interest to you?
  • Could you do some pro-bono work within your local community?

And finally, someone once said, “… if you think good advice is expensive, you should consider the cost of bad advice”. How true!

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About the Author

Steve is an ATEB Director and has a deep understanding of all matter regulatory, built up over his 30 years + in the industry. With a training background and a technical brain, he overseas numerous complex projects and client implementation work.

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