Ideas on improving the workings of the financial advice sector in the UK have been set out in a new report.
The UK government is being urged to consider tightening what is meant by “financial advice” so that it is based on a personal recommendation, creating a single definition for the whole sector and removing barriers to entry into the business.
The recommendation is one of a number of ideas announced today by the Financial Advice Market Review, published by the Financial Conduct Authority, the UK regulator. The proposals are being pushed forward amid concerns that a large number of UK citizens face an “advice gap” caused by the rising costs of meeting regulations, as well as other industry changes.
In 2013, sweeping reforms known as the Retail Distribution Review banned practices such as trail commissions and forced independent financial advisors to increase their professional qualifications. Regulations also sought to tighten what is meant by “independent” advice, a process some industry practitioners have blamed for squeezing out some players from the sector.
“This review has taken place against the backdrop of social and demographic changes which have led to an increasing need for individuals to take more responsibility for their own financial future. But we know that people often find it difficult to engage with financial matters and we need to make it easier for them to do so. The package of reforms we have laid out today will help increase both the accessibility and affordability of the advice and guidance to ensure that consumers get the help they really need when they really need it,” said Tracey McDermott, acting chief executive of the FCA.
The review is intended to help "address current concerns about the affordability and accessibility of financial advice and guidance, particularly regarding the ‘advice gap’. FAMR builds on improvements made to the financial advice industry brought about by the Retail Distribution Review (RDR) which raised the standards of professionalism across the financial advice market,” the FCA said.
The FAMR outlines ways to enable consumers to engage with and access advice and guidance, urges changes to how financial advice is defined and suggests a new advice framework to help firms to best meet the needs of consumers. The report makes a range of recommendations aimed at ensuring firms are able to provide more affordable advice for more consumers.
To make financial advice more accessible, FAMR urges the government to allow consumers to access a small part of their pension pot to redeem against the cost of pre-retirement advice.
“This will ensure that consumers can access financial advice at a key milestone in their lives and feel confident in making financial decisions as they approach retirement. The report also urges the government to explore ways to improve the existing income tax and National Insurance exemption for employer-arranged pension advice,” the statement said.
To provide greater certainty for advisors regarding their future liability while maintaining robust consumer protections, the report also recommended ideas on how the regulator can adjust funding for the Financial Service Compensation Scheme (FSCS). A review of FSCS starts in April.
FAMR has suggested that the funding review should explore alternatives to enable advisros to plan costs more effectively. It also proposes a series of measures to improve the transparency of the processes and decisions of the Financial Ombudsman Service (FOS).
The FAMR report said that after considering evidence, it concluded that relatively few complaints relate to advice given by independent financial advisors 15 years ago or more. As a result FAMR has ruled out recommending a 15 year long stop as this would inappropriately limit protection for consumers on long-term products.
The report comes out two days ahead of Wednesday's Budget by UK finance minister George Osborne, which is expected to touch on a number of areas of interest to wealth manager, including non-domicile rules and pensions savings.
Andy Bell, chief executive of AJ Bell, the UK advisor firm, welcomed the FAMR: “The current spaghetti soup of definitions surrounding financial advice is a barrier to access so the FAMR is right to focus on this. In a recent survey, 51 per cent of our customers said they cannot explain the difference between the service they would receive from a financial advisor compared to online guidance. Simple definitions that make it clear to people what they will get out of advice and guidance would help them understand the value in each and hence improve their engagement with both of them.
“Allowing people to access a portion of their pension pot early to pay for financial advice calls into question the level of belief that Pension Wise can work effectively. The transition from saving to generating an income is the point at which advice is most needed, particularly given the wider range of options following pensions freedom and being able to utilise pension savings to fund this would be a positive move," he said.
Old Mutual Wealth chief distribution officer Richard Freeman also
lauded the report: “The findings and recommendations of the
FAMR are good news for consumers and advisers alike and the
review has identified some important issues for
reform. High-cost and unpredictability in the FSCS levy has
become a burden on advisor firms, prohibiting small business
owners from investing for the future. The FCA and Treasury have
today recognised these concerns and we believe that a more
proportionate FSCS levy on advisors will help create economic
conditions that allow firms to grow."
“The cost and burden of regulation is also something that advisors tell us can be prohibitive to the growth of their business. Where regulation and regulatory processes can be simplified without consumer detriment they should be, so it is pleasing to see the regulator is prepared to look at reducing the length of suitability reports, making them more relevant and accessible for clients. It is also pleasing to see a firm commitment to clarifying the boundaries of advice and guidance. Defining ‘Advice’ as a personal recommendation would be a positive step, giving firms more clarity and creating a line in the sand between advice and guidance," Freeman added.