CompaniesMar 27 2015

Adviser margins and UFPLS default: This week’s news

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Adviser margins and UFPLS default: This week’s news

Earlier this week, the Financial Conduct Authority published three papers within one, very busy, day and it is unlikely this will slow down in the run-up to the pension freedoms.

These are the five key themes of the week.

1) Shrinking adviser margins.

This week advisers were hit with a double-whammy. Not only did they receive their interim levy for the Financial Services Compensation Scheme - with some equalling a third of last year’s total regulatory fees - but the FCA also hit them with the largest regulatory hike out of all the fee-blocks.

Advisers are to pay an extra £6.9m in fees towards the regulator, an increase of more than 10 per cent. Most ‘A’ fee-paying blocks will have to pay between 8.2 and 8.5 per cent more in the coming financial year, which the FCA said was due to, in part, a new £27m allocation towards ongoing regulatory activity.

The new allocation consists of £16m in staff costs, which the regulator said was focused on “increasing our headcount to deliver our enhanced objectives” and £11m on non-staff costs, which include upgrading its IT and technology platform and developing an academy.

On top of this, advisers are being asked to look at their business propositions so they can cater for the mass market, following the new pension freedoms.

The Pensions Advisory Service’s chief executive Michelle Cracknell told FTAdviser that an ‘entry level’ - which may be simplified advice in the form of a telephone conversation or Skype - would be one way to break down the cost barrier, adding that the client may then evolve to be a long-term client once they see the value of advice.

But due to all these regulatory hikes, can they afford to offer a cheaper service?

2) Rise of UFPLS as default.

Comparison tools for drawdown and annuity quotation were the main points that came out of the regulator’s retirement income market study. The FCA also said it expects people who go down the non-advised route to use uncrystallised funds pension lump sums as a default option.

On cash lump sums, the study states: “With some consumers looking to withdraw their income rapidly over a short period, transferring customers into new drawdown arrangements will come at a cost to many providers and UFPLS offers an easier solution for handling these requests.

“We expect UFPLS to be largely offered without a personal recommendation and typically being used by consumers with smaller pots. There is a risk that the benefits of other options... are not adequately explained to consumers and that UFPLS is potentially used as a default option.”

3) FCA’s big business plan.

The FCA revealed it has an increased budget of £482m for this coming year, covering a whole host of reviews, market studies and other work.

On pensions, the regulator will review retirement sales practices, including advice, non-advised processes utilised following guidance, and sales practices of pension product providers.

Providers will also fall under the regulator’s spotlight, being assessed to see how they are supporting customers to make the right choices, while it will also keep an eye out to ensure firms do not seek to undermine or circumvent the Pension Wise service in order to retain clients.

On the distribution side, the FCA plans a follow-up to the market study into the outcomes consumers receive from the products and services they buy at retirement. Advisers have already voiced fears that advice given now could give rise to future claims.

It will also review how well the market is working after the reforms and the guidance guarantee have been introduced, looking at advised purchases, reviewing the suitability of advice given, and non-advised purchases.

4) Increasing guidance costs.

It was also revealed this week that more uncertainty over costs is coming, with the FCA’s fees and levies paper showing that advisers will now have to pay £4.7m towards the guidance guarantee levy, revised up from £4.2m.

However, this remains an estimate and may be revised later in the year.

Indeed it appears that the guidance is already costing more than people envisioned, with the regulator stating that it will cost almost £1m to monitor the compliance aspect of Pension Wise.

This is comprised of £562,000 as a one-off monitoring cost and up to £395,000 per year in ongoing costs, including keeping tabs on Tpas and Citizens Advice Bureau, collecting their data on a regular basis and carrying out mystery shopping exercises.

5) Housing market continues slowdown.

Data out today correlated with data published earlier this month on house prices; in that they now exceed their 2007 peak. According to Land Registry, house prices are up 0.5 per cent since January and have increased by 6.5 per cent in the 12 months to February.

However, other data published today (27 March), revealed that the housing market growth has slowed now for seven months.

Let’s hope this continues as last year’s rapid house price growth is unsustainable.

donia.o’loughlin@ft.com