With good reason, I have been tracking the rumbling debate over the last six months about Simplified Advice and its place in the post Retail Distribution Review regime.
With almost 51 million adults living in the United Kingdom, and a smaller IFA population of say 20,000, each servicing perhaps 1,000 adults, there could be up to 30 million adult consumers who at some stage will seek out professional financial advice.
Since the Sandler Review in 2002, our Government has done its best to encourage the development and consumer take up of a more economical advice service through the Basic Advice and Stakeholder initiative. This initiative failed to widen consumer engagement, and product providers couldn’t or didn’t respond to meet the challenge. To counter this setback, the Money Made Clear initiative aims to help more consumers to identify their financial priorities and to encourage them to choose their own financial planning products – savings, family protection, retirement planning, but this service does not and cannot provide product advice.
In its feedback to CP09/18 the FSA provided new guidance to firms in relation to their responsibilities under Principle 6 (...client best interests rule), to consider whether the advice provided is likely to be of value to the consumer when the total charges the client is likely to pay are taken into account. It added “....we would not expect a firm to provide advice to a customer for whom the cost of that advice is such that it is not in their best interests to receive advice at all”.
The cost of providing financial planning advice arising from the Retail Distribution Review, is widely forecast to push access to ‘full advice’ up-market and therefore potentially out of the reach of up to 60% of the UK’s adult population. The Association of British Insurers’ (ABI) research suggests that under the existing commission-based system, consumers having less than £110 per month to save, or a lump sum of less than £13,000 to invest cannot be economically served by financial advisers. Under the new rules, an adviser firm would have to charge between £600 and £700 per client.
Enter the “Law of Unintended Consequences”.
My good reason for taking a close interest in this is professional, for the most part, but also as a member of the public. Professionally, we advise a number of mid-sized intermediaries whose customers look to their representatives for advice on straightforward financial planning solutions - term assurance, income protection, products into which responsible adults can make regular, affordable savings for a future life event. These firms meet a consumer need, which arguably has been unfashionable in the years where overspending on consumer disposables, fuelled by the easy of provision of credit, has been more popular.
Our work with these distributors is in planning for the post-Retail Distribution Review environment, a regime for which at this point, there appears to be every chance that middle-English families will have little or no opportunity to access face to face financial advice, without incurring a fee which the FSA has already warned might conflict with Principle 6, Treating Customers Fairly idealism.
In following the debate, what surprised me is that having created the environment in which the consumer is effectively to be denied face to face financial advice on modest regular savings products, the FSA says that it is not its place to develop a case for, nor to facilitate the emergence of a simplified advice model. Interestingly, the FSA’s Sheila Nicoll, speaking at the ABI Conference in May reminded her audience that “encouraging savings per se is not one of our statutory duties”. I can’t argue with that. However, one of its statutory duties is to protect the consumer, and it occurs to me that creating a regime where potentially 60% of the adult population living in its jurisdiction, are to be denied access to financial advice, runs close to a failure of a basic statutory objective which the Financial Services and Markets Act demands of the Regulator.
After Sandler, the sector developed low cost, simple products, but these didn’t prove to be popular. The case for Simplified Advice, however, is compelling, but there is a great amount of work required to figure out how consumers can access advice on these. Simple, the products may be, but the British consumer will not happily take to being denied advice on them.
When faced with the decision about which equities ISA fund to put their regular savings into, I wonder what percentage of the public will really want to make that decision without professional advice. Or how many of them will be puzzled that they can’t get such advice, in just over two and a half years time.
Mark Ehlinger - 18
th June 2010