With significant budget changes ruled out (for a while anyway) the pension community briefly turned its attention to the FCA’s final report on their Financial Advice Market Review (FAMR), hoping for something that would transform the savings market. It hasn’t quite delivered that, there is too much of the usual “should consider” and “continue to work on” to give any hope of immediate action, but it does acknowledge firstly that financial advice is a lifelong process, and secondly that we need to do more to make it accessible to those with less wealth.
For advisers and employers who look after retiring members these changes, if implemented, should make it easier to support them with the increasingly difficult financial decisions that they face.
The report highlights 3 areas in which improvements can be made, and we will consider the key recommendations in each.
If we want to make financial advice more affordable to more people, we need to reduce the costs of advice in delivering it. Most people simply cannot understand why financial advice is so expensive, not realising just how much work goes into delivering it. According to the report the typical initial advice process takes 9 hours of an adviser’s time to deliver, partly because advisers will usually consider every aspect of a client’s financial life before making a recommendation
Recommendation 2 – clarifying the definition of advice
Once a recommendation is made, and the client follows it, the liability for any consequences lies with the adviser. If an adviser or an employer simply offers information or guidance the liability for any subsequent action is with the consumer, however there are very valid concerns that consumers do not realise this. Focussing on whether a “personal recommendation” has been included should make it easier for consumers and regulators to identify who carries the responsibility.
If the consumer makes their own decisions it would reduce both the financial liability and the amount of work the adviser needs to do.
Recommendation 4 – make it easier to offer streamlined advice
Recommendation 8 – simplify the production of suitability reports
The recent pension freedoms have also led to a demand for more specific services. For example, an individual approaching retirement may wish help in selecting the best way to take their pension benefits, but does not want or need help with other aspects of their finances. Reducing the scope of advice would obviously reduce the 9 hours considerably.
Care must be taken to ensure consumers are clear about exactly which areas of their finances are covered, and which aren’t, which should be possible via a simplified suitability report with, for example, a checklist of areas discussed.
Recommendation 9 – develop automated advice models
Much of the work carried out by advisers involves analysis and projections. Technology will never replace the personal touch but it can make light work of the maths, making it quicker and easier to deliver, and it does provide a valuable record of the work undertaken.
Even if the cost of advice is reduced, many individuals may still need help in paying for it. The report includes 2 key suggestions on how this might be done.
Recommendation 13 – improve incentives for employers to pay for financial advice
Recommendation 14 – allow savers to use part of their pension fund to pay for advice
Both of these suggestions require changes to the way in which employee benefits are taxed. In the first instance the Treasury has confirmed an increase in the exemption under benefit-in-kind for financial advice, from £140 to £500; and in the second they have confirmed a new exemption to protect any funds withdrawn specifically to pay for advice.
The Financial Services Compensation Scheme (FSCS) provides valuable protection for consumers who have been mis-sold or mis-led over their investments. The scheme is funded, not unreasonably, by the financial services industry. However there are concerns that the current method of allocating costs is unfair.
Recommendation 20 – explore risk-based levies which reward good financial practice
Many well run adviser firms who have few or no customer complaints feel that it is unfair that they bear the costs of firms whose clients are less happy, particularly if the firm is recommending less risky investments, which have a lower chance of going wrong. By relating the levy to the type of advice and investments offered and the complaints experience of the firm, it should be possible for the better firms to flourish and to offer less expensive services.
This is by no means a comprehensive list of the proposed changes – as mentioned there are 28 recommendations all of which are aimed at making financial advice available to more people.
Those sectors of the market that are already well served by wealth managers and advisers who concentrate on high net worth clients will be largely unaffected. But it is to be hoped that these changes could make financial advice more accessible, and more familiar to all.
Fiona joined the life and pensions industry in 1989. She is a Fellow of the Personal Finance Society, an Associate of the Chartered Insurance Institute and is currently Vice-President of The Insurance Society of Edinburgh. Fiona specialises in the areas of at retirement planning and pensions and divorce.