By Fiona Tait, Pensions Specialist at Royal London
The stated objectives of FAMR are to make advice more “affordable” and “accessible” which is more likely to lead to new and complementary services, many of which may be offered by new entrants to the current market.
This provides both an opportunity and a concern. The opportunity lies in the potential for advice firms to expand the range of advice services currently offered; the concern is that rather than attracting more people to take advice the new entrants might divert existing clients towards options which may deliver less suitable outcomes. That said there are some really good things in the report and, inevitably, some that are more disappointing.
The really good bit
Recommendation 2 proposes that the definition of regulated financial advice should be amended to include a personal recommendation. The battleground over the use of the “advice” word was understandable but not of great benefit to the end client. What really matters is that the client understands what service they have been given, not what it is called.
The proposed change would allow the purveyors of both guidance and advice to ask the client to clearly confirm either that
a. I understand that I have been given information relevant to my situation which will help me to manage my finances, but that any decisions I make as a result of this are my own responsibility.
b. I understand that my financial adviser has given me a personal recommendation based on my individual circumstances and that the adviser takes responsibility for the course of action followed.
The pretty good bits
Well performing firms should be encouraged rather than penalised for the behaviour of others so the announcement that the Financial Services Compensation Scheme will in future be funded via risk-based levies is extremely good news. Clearly there will need to be more work before an acceptable methodology can be introduced but on the whole it should benefit financial advisers who, as a body, tend to have much lower claims against them than other financial services companies.
It is also very welcome that the regulator is recognising the benefit of streamlined advice services. However, I believe this should not just be a way to reduce costs but also a recognition of additional expertise and skills. In any other profession specialisation is considered a positive thing and so I would like to see an advice category that recognises this, and one which is not just “streamlined” but actively “specialist”.
The success to date of automatic enrolment shows that reaching potential savers via their employer is very effective. The increase in the amount that can be funded by employers in respect of pensions advice, from £150 to £500, before it becomes a benefit-in-kind may stimulate the development of specific advice packages which can be delivered within this limit. Similarly allowing people to withdraw up to £500 from their pension fund to pay for advice could be of great benefit, particularly if the two initiatives work in conjunction
The disappointing bits
Advisers everywhere were disappointed at the decision not to restore a 15 year long stop, after which complaints could not be brought against advice given. This would have introduced an element of certainty and helped advisers (and their PI insurers) to manage their potential liabilities better.
An overwhelming 76% of the advisers in our poll supported the notion that streamlined advice should be delivered by impartial advisers and Royal London was also disappointed that the regulator did not do more to support this. Vertically integrated firms which are both product manufacturer and salesforce cannot be considered impartial. While in many cases the products being promoted may offer good value, the concern is that there is no choice. There is therefore considerable potential that some propositions will arise which lead clients towards lower quality products without them being aware of it.
If anything, the report is actually encouraging the vertically integrated model by proposing the relaxation of rules which prevent these forms offsetting the cost of advice by increasing the charge on the product. If not very carefully monitored this could lead to lower cost advice services which would undercut fully independent advisers.
In summary
Overall, the recommendations in the report seem to me to be a good start. There is a little too much “we will consult on” as opposed “we will act” but if the majority of the recommendations are followed through there is a good chance that more people will be able to access some form of advice services, particularly in respect of pensions and retirement decisions.
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