Posted: 6th April 2016
“The government’s reforms to private pensions have given people more access to their retirement savings, potentially leading to a greater need for advice than before.” (FAMR)
The FCA launched the Financial Advice Market Review in August 2015 to examine how government, industry and the regulator can stimulate the development of affordable and accessible financial advice and guidance. The report was published on the 14th March, and sets out a series of recommendations to tackle the barriers to access observed in previous FCA work.
The regulator asserts that the need for customers to seek financial advice is now greater than ever. This is given the extent of pension changes and the increasing expectations of investment customers in a more challenging post-2008 investment environment. Despite this, they observed that there has been a reduction in the provision of regulated advice since 2012’s Retail Distribution Review.
The FCA’s findings are broadly categorised into three areas:
- Consumers would like more support in understanding what options are available to them
- The market currently delivers high-quality advice to those who can afford it, however, consumers don’t always need a comprehensive assessment to determine their best course of action
- A barrier to providing advice to those consumers with simpler needs is uncertainty on what distinguishes regulated advice from more general forms of guidance
- The FAMR asserts that new technologies can play a significant role in driving down the cost of supplying advice
- The FAMR recommends the development of a clear framework to give firms the confidence to deliver advice on simple consumer needs
- Analysis of the call for input suggests a lack of consumer engagement with advice
- The cost of advice is affecting customer demand. Simply; those with less wealth find advice less cost-effective than those with greater wealth
- Limited consumer understanding of the benefits of advice is suspected to be limiting customer demand. This is due to a lack of consumer awareness and firms’ wariness of the associated liabilities
- The workplace is seen as an opportune place for people to access financial guidance; however, employers are also wary of the regulatory liabilities
On this last point; FAMR wishes to clarify the level of help employers can provide their people without exposing themselves to regulatory liability. They also wish to improve the incentives offered to employers to support their employees’ financial health where appropriate.
Liabilities and customer redress
- The FAMR recommends building-in appropriate protection for consumers if they are to have confidence in financial advice
- It seeks to strike a balance between the need to give firms confidence and the need to ensure that consumers suffering due to poor advice are appropriately remediated
- Firms have identified that the unpredictable nature of the Financial Services Compensation Scheme (FSCS) levy makes it hard to plan effectively. FAMR recommends that the FCA’s review of how the FSCS is funded should explore risk-based levies and whether firms could make more use of the credit facility available to the FSCS
Additionally, the review mentions concerns expressed about the Financial Ombudsman Service (FOS) and the impact their work has on firms’ confidence over advice:
- The lack of enforcement of a longstop after which consumers can no longer complain about financial advice
- The potential for the FOS to apply today’s standard of judging complaints to complaints made years ago, rather than the standard applicable at the time
Regulatory next steps
The FCA and the Treasury will continue to collaborate over the next 12 months to develop an appropriate baseline from which to monitor the development of the advice market.
As well as this, both parties will report jointly to the Economic Secretary and the FCA board 12 months after the publication of FAMR. This will then lead to a 2019 review of the outcomes of FAMR.
The FCA has been clear about a number of immediate things it is doing:
- A Policy Statement will be released in the second quarter of 2016 directly addressing FAMR next steps
- The FCA intends to consult on consumer protections in a secondary market in annuities in April 2016
- The FCA is launching a Retirement Outcomes Review in quarter two of 2016.
- The ‘regulatory sandbox’ will also be launched in spring 2016 to support the development of ‘robo-advice’
Additional information on the timeline for implication can be found the FAMR final report pages 60-64.
Considerations for firms
The changes proposed by the FAMR, similarly, fall across the three areas of accessibility, affordability and liability, and are numerous. As such, it’s clear that work will be ongoing in the advice space as various parties continue to consult to determine the viability of (and the need for) the recommendations made by FAMR. Nonetheless, there are some key considerations for firms in this space:
- Can you harness technology and/or paraplanning to increase efficiency and reduce the cost of advice?
- Can you examine pricing structures in line with the level of advice given, assuming your firm is given confidence over definitions of advice?
- Has your firm de-risked to the point of no longer offering sufficient advice options? Will this be a tenable position in future due to market pressures?
- How will you prompt consumer desire to obtain advice, again assuming your firm is confident over definitions of advice and its liabilities? How will you ensure consumers are aware of the benefits?
- Will there be an opportunity for your firm to interact with employers to provide advice? Can this form part of future strategy?
Liabilities and consumer redress
- How can you ensure your approach keeps up with industry best practice and does not expose your firm to excess risk?
- Be on the lookout for opportunities to engage with industry bodies on advice, including the FOS and the FCA, for example, through discussion and focus groups
- Ensure you monitor any changes coming out of the FSCS Funding Review later this year for developments affecting your firm
There are clearly many variables in this space following FAMR, and developments will be ongoing and are likely to be frequent. Nonetheless, there are clear considerations for your firm to think about right now. Huntswood will continue to monitor this area and provide updates.
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