Advisers and providers are braced for a fundamental shake-up of the advice market following the Government’s announcement of a wide ranging review of the sector said to be on a par with the RDR.
The Financial Advice Market Review, announced earlier this month, has the overarching aim of establishing how the advice market can work better for consumers. It will also consider the impact of regulation on the affordability and availability of advice.
The implications of this work could see the lines between advice and non-advice redrawn, as well as providing a gateway to mass market advice for the banks and providers shut off from this market post-RDR.
It poses questions about how a more flexible advice market can work within the constraints of European regulation, and whether it is right to dilute rules around liabilities and qualifications in a bid to narrow the advice gap.
Industry experts say the review signals the Treasury’s intent to seize control of a situation that threatens to derail the success of its flagship pension freedom reforms. Fundweb sister publication Money Marketing understands the review has been the subject of discussions at the highest levels of Government, and there are signs of a growing impatience with the FCA for failing to grasp the nettle on the advice gap.
So what would the review mean for advisers in practice? Is there something to be said for banks and insurers coming back into the advice space? And can this advice revolution deliver what firms have been craving for decades – a proportionate regulatory system that encourages, rather than destabilises, the advice profession?
The advice review has been launched jointly with the FCA, but it is clear it is the Government is driving this project.
It will be supported by an advisory panel led by Scottish Widows chair Nick Prettejohn and will cover products including pensions, annuities, savings, mortgages, and general insurance.
Initial work will be done over the summer with a consultation in the autumn. Final proposals are expected ahead of the 2016 Budget.
The Personal Finance Society was among the adviser representatives lobbying the Government for reform ahead of the review’s launch.
Chief executive Keith Richards says some have already christened this as “RDR Mark II”.
He says: “The RDR was all about protecting public interest and increasing transparency and professionalism. But what it didn’t do was actually tackle the thorny issues of an advice gap, exclusion from advice and how we rebuild the public confidence back into a savings culture. This review is the start of doing that.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “Pension freedoms have been the catalyst, and the Treasury has lost patience with the fact that people can’t get simple low cost support.
“As with the pension tax relief review, where pretty much everything is up for grabs, this advice review implies a fairly broad mindset and some fundamental principles could be changed. I was genuinely gob-smacked when I saw it.”
Apfa director general Chris Hannant says the cost of regulation is set to be at the heart of the trade body’s formal response to the review.
Hannant says among other issues, Apfa wants to see the Government tackle the level of FCA fees and Financial Services Compensation Scheme levies. It is also keen to see reporting requirements addressed and a different approach taken by the Financial Ombudsman Service.
One proposal included in the advice review’s terms of reference is the creation of “safe harbours”, described by the Treasury as “a regulatory carve-out”.
Hannant says he expects such a move would see the Government and the FCA offer reassurance about liabilities for advisers working on certain classes of products, or meeting certain conduct guidelines.
He says: “When people talk about safe harbours, they mean that if you do something specific then you won’t get into trouble.
“That could take the form of safeguards in place if you are recommending certain approved products that are deemed to be suitable for most people.
“You could even offer some protection against the FOS in certain circumstances – that if you took certain prescribed actions that you would not be deemed to have done something wrong further down the track.”
Wealth Management Association director of regulation Ian Cornwall says it remains unclear how this will function in the context of broader European regulation like Mifid II.
Cornwall says: “We want to know how the safe harbours idea is possible given that we operate in a European framework.
“We do sense there is a desire to bring more flexibility into the advice market, and we are going in with an open mind, but it’s a question how some of these questions will fare within that.
“We are awaiting further dialogue to understand what those terms of reference might mean.”
Hannant suggests one way to sidestep this concern would be to offer less severe punishments under the safe harbour rules when an adviser makes a mistake, rather than scrapping penalties altogether.
He says: “There’s some leeway you could use on the consequences for people who are inside a safe harbour so that they might be treated in a different way if they end up in front of the FOS, for example.”
Return of the banks
The advice review also raises the prospect of revisiting the definition of advice, or in Government-speak, “proposals as to whether the regulatory perimeter for financial advice should be amended, taking into account European legislation.”
This has prompted suggestions that banks and providers could make an advice comeback.
Richards says: “There’s no question the Government recognises professional advice has been pushed further up the value chain because of the level of impact and cost that has been placed on it and they want to address that.
“They want to address that for all levels, but you can’t just address it for one group of consumers.
“So it’s likely we are going to see solutions that will enable large organisations, whether that be banks or insurance companies, to present the right solutions to give more simplified access to advice.”
The return of banks and providers to the advice space has prompted disquiet among some firms, raising concerns of “two-tier regulation”.
Aegon UK chief executive Adrian Grace argues any loosening of advice requirements could have severe unintended consequences.
He says: “We have to have the same standards across the board. Having set a new advice standard through RDR, I don’t think we can weaken that now because that is not the right thing to do.
“To think that banks or other financial bodies could have lesser standards for providing financial advice is fundamentally wrong.”
Grace adds: “We need to work out how to provide advice to middle England, but a lot of that can be done digitally and through guidance, in partnership with advisers.
“As soon as you start to weaken the regime, you open up a space for a whole series of cowboy tactics.”
But EY senior adviser Malcolm Kerr disputes this outcome as a foregone conclusion.
He says: “It may be that there’s a system that allows for more focused advice for people who just want an Isa, but I can’t imagine that the requirements for that would allow it to be any less well researched and executed than if it was through an adviser.
“I don’t subscribe to the view that there would be a reduction of quality, and I don’t think there will be any lower standards for banks and large organisations than advisers.”
Instead Kerr argues the prospect of banks giving advice could be a positive for consumers in the post-RDR era.
He says: “Institutions can invest in technology that would make the process more efficient and less open to mistakes being made, and that’s a good thing because more efficient might mean less expensive.”
Kerr adds for someone planning their retirement, working with a larger business may provide the reassurance that the firm will still be in place when they come to retire.
“The bottom line is a 55-year-old has 30 years of life expectancy, so those savers might take some comfort from knowing that the organisation looking after that money is still going to be there and in the same format.”
Crossing the Rubicon
Beyond the review itself, the way in which it was announced points to an increasingly aggressive Treasury seeking to stamp out any potential concerns around the rollout of pension freedoms.
McPhail says: “It really looks like we have crossed the Rubicon in terms of the Treasury taking control of the regulatory agenda.”
PR firm Hill & Knowlton financial services public affairs adviser Henry Groundes-Peace agrees, describing the advice review process as “a timeline of intent”.
He says: “The Treasury is no longer waiting for the regulator to decide or evaluate for itself but is dictating terms.
“This level of activity presents considerable opportunity to those wanting to propose changes.
“The advice review has a worthy goal to bridge the advice gap. But it is up to external players to persuade the Treasury and the FCA on the changes they would like to see, not out of self-interest, but by demonstrating ways the consumer can benefit.”
Independent regulatory consultant Richard Hobbs is clear the launch of the review represents a significant intervention by Government.
He says: “If you are confident in your regulator you can have a fairly laissez-faire attitude, but you are unhappy or frustrated with it then you will tend to try and be more influential.
“The advice review is a clear example of Whitehall becoming frustrated with where the FCA is at. What it amounts to is taking policymaking away from the regulator, at least for the time being.”
Expert View: Keith Richards
There is evidence that recent reforms introduced by both the Government and the regulator have made significant improvements to the advice market, and there are plenty of advisers who would accept there has been a need for regulation in the past.
But once reforms have been put in place and there is clear evidence of improvement, there is a point at which we must see that level of regulation start to rebalance so the profession can move on accordingly.
That is what we are starting to see from the Government- a recognition that the focus needs to be on public needs rather than protection.
It is likely we are going to see solutions that will enable large organisations, whether they are banks or insurance companies, to present the right solutions to give more simplified access to advice.From a broader sense, that is not a bad thing. We need more public engagement, we need better education and we need people back in a savings culture. Then you will see people stepping into different models appropriate to their needs.
But we have to be honest about this. A lot of advisers have built some very successful businesses over the years and would not necessarily want to diversify into offering more cost-efficient or lower cost entry solutions. Others of course will want to do just that.
All advisers have a role to play through the consultation process. But the key thing is for us to be professional and balanced in our solutions. What Government will not be interested in is a one-sided argument that is all about us. If it leads to better outcomes for the public then they will be all ears. We will be pushing against an open door as long as we take that approach.
Keith Richards is chief executive of the Personal Finance Society
The road to revolution
December 2012: RDR comes into effect
March 2014: Chancellor George Osborne drops his Budget bombshell allowing over 55s access to their pension backed by “free, impartial, face-to-face advice”
March 2015: The Pension Wise guidance services begins taking bookings through The Pensions Advisory Service and Citizens Advice.
April 2015: Rollout of pension freedoms
June 2015: Osborne announces review into “excessive” exit fees, and floats the introduction of a cost cap
July 2015: Work and Pensions select committee launches probe into affordability and accessibility of financial advice
August 2015: Treasury and FCA unveil Financial Advice Market Review.