OpinionDec 13 2013

My Christmas wish list from the FCA

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It is that time of the year when children that are still young enough to have not yet had their innocence compromised by the drudging, quotidian reality of life write their letters to Santa Claus.

I’m sure that you, dear reader, are far too long in the tooth and cynical of nature to pen your own notes to the mythical gift-giver, but most of you would probably feel you would fall under the ‘nice’ heading on St Nick’s famous binary list and are deserving of some kind of reward.

As such, while you will no doubt find it difficult to imagine our regulator as either benevolent or profligate (though based on its rising costs I reckon you might see a strong parallel to Mr Claus’s corpulence), I would like to submit a few requests on your behalf.

Obviously this is not in expectation of a seasonal generosity of spirit taking hold in Canary Towers and bringing any of this to pass in time for the Christmas morning buck’s fizz, but rather details the issues that I believe the Financial Conduct Authority must focus on in particular over the coming year.

1) Simple measures to close the advice gap

It has been the defining issue of the post-Retail Distribution Review world: are lower-value clients being denied access to advice following the switch to fees and amid a culture of rising regulatory costs?

Many in the industry have called for the FCA to create a framework for a simplified advice model that could be used to service less wealthy clients

The simple answer is yes. Two separate pieces of research published last week by the Association of Professional Financial Advisers and Schroders revealed that advisers are being forced to turn away business, while some are even asking existing clients to leave.

That is not to say advisers are not doing well, as there is strong evidence to suggest many are. Many larger firms have reported increasing profits and margins, and yet-to-be-published FCA data show that incomes have risen 5 per cent in 2013.

What it does suggest, as anecdotal evidence has consistently shown throughout the year, is that full advice is becoming increasingly unviable for clients with small pots - both for advisers in terms of profitability and for the clients in terms of value for money.

Perhaps the solution to all of this is equally ‘simple’. Many in the industry have called for the FCA to give full regulatory backing and create a framework for a simplified advice model that could be used to service less wealthy clients, who arguably need help now more than ever.

The existing solutions based around ‘non-advised’ sales are clearly fundamentally flawed, as a deeply critical report from the Financial Services Consumer Panel attested this week. Consumers need support, not yet more web-based sales mechanisms with significant conflicts of interest.

Such a service that did not demand level four qualifications and that would enable higher volume business to be serviced could also provide a route to market for prospective new entrants and thus help to alleviate the potential asphyxiation of the sector due to a lack of new blood.

2) Limiting the rise of restricted

Last year I wrote a piece arguing that consumers are not likely to place importance on whether or not their adviser is independent or restricted. I stand by that.

But that is not to say that the clumsy redefinition of advice labels to make independence mean something akin to ‘exhaustive’ and restricted mean ‘everything else’ is not extremely damaging. On the contrary, it potentially poses one of of the biggest threats to the whole RDR project.

Restricted is easier and simpler; you can be tied, multi-tied, whole of market in particular product areas or a combination of the above. The moniker does not differentiate and thus it is difficult for clients to judge, even if the “nature of the restriction” does need to be detailed.

Worse, the rise of the ‘product panel’ based on preferential terms and, according to some, hefty marketing payments, is giving rise to a commercially-driven product bias that the removal of commission was supposed to remove.

The answer I would ideally like to see is the definition of independence being put back to close to its dictionary definition, so that we can clearly see which providers are offering a limited set of products and which are not.

I suspect the solution more likely to be palatable to the regulator is creating a branch within restricted for those that continue to be ‘whole of market’ that are not tied to providers either through ownership or product panels.

3) Lifting the burden

Finally, and perhaps most importantly, I would dearly love to see the FCA giving advisers a break by reducing their fees. Ultimately clients pay these costs anyway, so it’s benefitting those the watchdog is charged with protecting.

Every measure of complaints suggests advisers represent by far the lowest risk in the financial services sector, for example accounting for less than 3 per cent of Financial Ombudsman Service claims. Yet despite this costs have been spiralling and rose by 15 per cent again this year.

The regulator did offer some respite by addressing an inequality in the fee blocks that will save 7,000 advice firms in the A13 fee block that do not hold client money more than 6,000 each, but more could be done.

Advice is probably they key defence against sector scandals and frauds that are so detrimental to consumers. A cut in fees next year would be the best way to help them continue doing what they do best - and making sure this is affordable to those that need it most.