OpinionJul 21 2014

Regulator’s consultation leaves industry totally baffled

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Maybe it was always too good to last. After a couple of years of mostly making sense, the FCA has gone back to the mad, bad and impenetrable old ways of the Tiner/Sants-era FSA.

Perhaps it is the sheer accumulation of rules – Mifid included – that have confused things.

The regulator has issued a consultation paper on guidance, designed to bring clarity to the market and outline a middle way between execution-only and advice. Instead, it risks further confusion and more grey areas.

To take one illogical suggestion first, the paper suggests that an advice firm providing simplified advice cannot be independent and so must be restricted.

To take one illogical suggestion first, the paper suggests that an advice firm providing simplified advice cannot be independent and so must be restricted

Were this to come into effect, it would bar a lot of good financial planning firms from taking advantage of the reform, because many of these firms are determined to retain their independent status.

Surely any reasonable person would want to see that ethos applied lower down the income scale and across the wider market. But I fear the FCA has tripped over its old rules.

There must be some form of wording that can distinguish between a simplified service and a full independent practice that doesn’t see the firm lose its ‘independent’ status. The regulatory divide between independent and restricted could still apply to full advice services.

Elsewhere in the paper, every suggestion that could make giving advice or guidance easier – and potentially cheaper – comes with a caveat. The FCA notes that advisers are worried about building up systemic mis-selling liabilities in a large number of cases, which they fear could effectively finish them off in business. Yet it doesn’t offer sufficient clarity to address the concern.

The paper says that in the case of a focused or limited advice – in a case dealing, for example, with an old with-profits policy – an adviser may also need to raise other potential advice needs such as protection insurance for those with families, although the adviser does not have to provide specific advice about it. (Er?)

It is almost as if the FCA cannot bring itself to draw clear lines between the different types of advice.

The paper takes a similarly confusing line when it comes to defining the use of decision trees and whether they constitute guidance or actually contain personal recommendations. That, says the FCA, depends. It may be possible to recommend a sector, but not a couple of funds. That presumably must be left to execution-only services.

There is talk about how this means generic decision trees might recommend a sector – but not a share or a fund. Perhaps energy but not BP; Asia but not Young.

That these trees need to avoid recommending a transaction may be understandable, but it actually goes against what consumers will want from such services.

One has to ask how would this paper help a consumer due to take their pension as income? The best thing would be to seek full advice. But focused advice would be better than using a decision tree. And a decision tree designed by a competent adviser arriving at some action would be better than nothing.

Yet I am not sure this paper, if it makes it to the rulebook, would facilitate this. It may actually put advisers off further.

John Lappin blogs about industry issues at www.themoneydebate.co.uk