The RDR was launched by the Financial Services Authority in 2006 with most of the rules coming into force at the end of 2012. It aimed to improve trust in the adviser market by improving the transparency of charges and services, removing commission payments to advisers and platforms from providers, and increasing the professional standards of advisers.
FAMR was launched jointly by the FCA and HM Treasury in 2015. It aimed to make the financial advice market work better for customers by developing affordable and accessible financial advice and guidance. They jointly published in 2016 a series of 28 recommendations which were duly implemented over the next couple of years.
The FCA is now reviewing whether these initiatives have succeeded in meeting their objectives. They are also looking at what customers want from the market, how the market delivers this, and the future development of advice and guidance services.
We believe the RDR has been successful in meeting its aims. It has made advisers more professional and removed the risk of commission bias from recommendations, but it has also increased the advice gap. Unfortunately the initiatives introduced by the FAMR have been largely unsuccessful in reducing this gap. This is because they have failed to provide the support that customers need.
The FCA has carried out a Call for Input, held events and met firms to gather insight and feedback into the issues they should consider in their review. Some of the main themes emerging are considered below.
Many customers struggle to access a wide range of services to help them with their financial planning. The launch of the pension freedoms in 2015 led to a significant increase in demand for advice from customers seeking help with their retirement choices. Advisers can be selective over which customers to take on and unfortunately those with smaller pots tend to lose out due to being less cost effective for the adviser.
Most advisers only offer customers full advice. Cheaper forms of advice are not widely available due to adviser fears of complaints to the Financial Ombudsman Service. The high cost of providing full advice means it’s not affordable for many customers or cost effective for those with smaller pots.
We believe all customers should have access to a low-cost advice service. Simplified and focussed advice are supposed to fulfil this role. Advisers need confidence that by offering such advice they will be judged fairly by the Ombudsman in the event of a subsequent complaint. In particular, they will not be judged to the same standards as if full advice had been provided to the customer.
The regulatory boundary between advice and guidance is not clear. This has resulted in firms taking a cautions approach to providing useful information to customers in case it is perceived as advice. Most firms could go a lot further and provide more tailored guidance without stepping over the boundary. It’s firms’ compliance departments that are preventing them from doing so for fear of providing advice.
We believe the FCA need to provide greater clarity on the boundary. They need go further than the current perimeter guidance examples on what would and would not be considered a personal recommendation. They need to work with firms and publish real life examples of what is and is not advice. Firms need greater reassurance on what is considered acceptable guidance and thereby avoid potential future claims being ruled against them by the Ombudsman.
Automatic enrolment was introduced in 2012 to address individual inertia in saving for retirement. Individuals are automatically enrolled into their employer’s pension scheme unless they opt out. There is no need or reason for individuals to engage in the financial planning process with most trusting their employer to do what is best for them.
Pension Wise does a great job in educating customers approaching retirement on their options but it has a low take up rate, and by this time it’s often too late for the individual to take any meaningful corrective action.
We believe education on financial planning issues needs to improve to encourage greater customer engagement with advice and guidance services and a lot earlier. Education needs to start in schools and continue throughout an individual’s working life up until they have taken all their pension savings.
Firms can encourage customers to take advice or seek guidance through communications like the yearly statement. Government must also play their part through improving financial education in the schools and employers through encouraging their employees to take up these services.
New forms of advice and guidance, including online services like robo-advice, can reach more people but they are less popular than traditional face-to-face advice. This may be because they are still relatively new and take time to bed in. Online banking took many years before it became mainstream. Many customers want to be told what to do and face-to-face advice provides this together with the human reassurance that they seek.
As mentioned above, most advisers only offer customers full advice. Most customers have relatively simple financial needs so a streamlined advice process for simpler product would be a proportionate way of meeting these needs.
We believe new forms of advice and guidance have a role to play in delivering cost effective advice and guidance to a greater range of customers. Streamlined advice has the potential to serve the masses but firms offering it need to have clarity on how they will be judged by the Ombudsman in the event of a subsequent complaint. The lack of clarity on this point is holding back the development of such services.
The FCA is collecting additional industry data by sampling firms and customer data through the Financial Lives Survey and consumer research. They will provide an update on their work in early 2020 with a final report expected to be published later in 2020.
Proposition Strategy & Insight Manager
Robin has worked for Royal London for over 30 years with experience in marketing, research, technical support and product development. He currently specialises in the savings and at retirement markets.