OpinionSep 12 2013

Has Wheatley given green light to new simple advice model?

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It is not just advisers that are being haunted by the spectre of that notorious three-letter initialism that marked a major schism in the advice market in January. The regulator must by now be coming to hate the RDR as well.

More specifically, the Financial Conduct Authority must now dread hearing those two words that for many represent the most pernicious unintended consequence of the new rules: the ‘advice gap’.

As well it might; having committed an egregious dereliction of duty by not even modelling the impact of the new regime on consumers - the very people it is designed to benefit - it must now face up to the consequences.

This week Martin Wheatley almost escaped from his Treasury Select Committee evidence session without being challenged on this issue, before Mark Garnier, committee member, former investment banker and outspoken RDR critic, asked the loaded question the FCA chief executive must have been dreading.

He asked: “Are you seeing any evidence that the RDR has resulted in a reduction of the supply of advice to people particularly in the more impoverished end of the marketplace?”.

To his credit, Mr Wheatley did not seek to dodge the bullet.

He admitted there are “some issues with the withdrawal of the mass market distributors from the retail market”, referring to the loss of bank advisers from retail advice in the lead up to the rule changes and anecdotal evidence that regulated advisers are moving up the value stream due to the costs of servicing so-called ‘lower-value clients’.

He stated: “I think most of the banks worked out and most of the advisers worked out that you can’t provide a fully advised service with less than five or six hours of work and that costs, and therefore that model, we are seeing less of it.”

Never one to end on a downcast note, however, Mr Wheatley offered a silver lining in the form of “the arrival of web-based, internet-based entrepreneurial type models that are delivering advice in a different form”, which he intimated would service those consumers that may have been left adrift by the wider migration up-market.

The FCA committed an egregious dereliction of duty by not even modelling the impact of the RDR - it must now face the consequences

For my money, the FCA is right to focus on bank advisers leaving the market rather than a wider drop in advice numbers, despite the conflation of the two in some reports.

The recent 6 per cent increase in the number of qualified advisers - less a bellweather of a future boom in numbers than a natural consequence of laggards belatedly hitting the level four grade - is still a welcome sign that a predicted mass exodus is seemingly not coming to fruition.

These numbers would appear to provide an effective counter to assertions that we are simply haemhorraging advisers.

There are also questions as to whether the move to focus on higher value clients is as pervasive as some - including the FCA - clearly believes it to be.

Of the 3,000 individuals that have reviewed their adviser’s profile on intermediary review website VochedFor, close to a third have less than £50,000 in savings and investments.

Moreover, some advisers rightly express concern at online models being labelled as advice.

One commentator on our report on the Treasury Committee session this week said: “The expression ‘web-based advice’ is a nonsense - if it is ‘advice’ then someone has to be accountable.”

All of this notwithstanding, Mr Wheatley’s comments give me cause for real hope.

Obviously there are some consumers that have been, for want of a better word, ‘abandoned’ by a move upstream by their adviser or the loss of their bank adviser.

Even in spite of Mr Wheatley’s perceptive assertion that much of this bank ‘advice’ was actually “simply sales dressed up as advice”, there is still a market that is no longer being serviced, and the FCA giving tacit approval for proper advisers developing systems to target this group in a cost-effective manner is therefore positive.

More pertinently, this could be the solution to the more insidious problem facing the adviser sector in the coming years: the lack of fresh blood coming into the sector.

Speaking to me earlier this year on this very issue, Malcolm Streatfield, chief executive of national advisory business Lighthouse Group, said the sector was being asphyxiated because there are no longer the incubators of new adviser talent - the home insurance and life company direct sales forces and, later, the bancassurance arms of major banks.

Mr Streatfield argued the solution to this would be a “simplified” advice regime endorsed by the regulator; a system that would allow certain advice processes - particularly those that utilise online tools - to be carried out under supervision by new advisers while they spent two to three years studying to become level four qualified.

After becoming qualified these ‘apprentices’ could then move into full-service advice of more sophisticated clients and vacate a space for the next new entrant.

Endorsing such a model would make taking on graduates economically viable - and potentially help to tackle the advice gap, all in one simple policy move. Mr Wheatley’s comments could hint that such an approach would be welcomed by the regulator.

Unlike its actions in relation to the RDR consequences it must not passively sit back and let nature take its course, it must take a decisive lead on this issue. And the sooner the better.