Just 32 months after the implementation of the Retail Distribution Review (RDR), the FCA has admitted there is a problem with the delivery of financial advice. The response from the regulator, after spending £1.7bn on the RDR, is another market review.
The financial advice market review (FAMR), headed by interim chief executive of the FCA, Tracey McDermott, will consider methods of delivering financial advice to those who can not afford to engage with a financial adviser, those in the so-called advice gap. The RDR experiment, has inevitably resulted in rising advice costs, reduced adviser numbers and a significant reduction in the delivery of financial advice.
The FCA may have avoided the topic of the advice gap had it not been for chancellor George Osborne, whose pension freedoms now allow individuals to raid their pension holdings, increasing demand for advice from the mass market.
In desperation to meet the growing demand, the FCA called for the industry to innovate and provide cheaper online solutions. The industry responded with accusations that proposed guidance was drab and meaningless, and that innovation was hindered by an outdated draconian regulatory rulebook.
The mass market distributors want to meet demand without building future liabilities and paying excessive regulatory costs to fund the Financial Ombudsman Service (Fos) and the Financial Services Compensation Scheme (FSCS).
It should not go unnoticed that the expert advisory panel on the FAMR is to be chaired by Nick Prettejohn, Chairman of Scottish Widows and a great friend of George Osborne, having advised him on the restructuring of banking regulation. Scottish Widows, owned by Lloyds, no longer provides advice to the mass market. Clearly it sees pension freedoms and the mortgage market as an opportunity, given the right regulatory environment.
The problem for advisers of future liabilities and complaints, and contributions to the costs of the FSCS and Fos need addressing. Regulatory rules need loosening to allow an American-style fiduciary / suitability system. If a client pays for independent financial advice, the adviser has a fiduciary duty, similar to the existing IFA system here in the UK. Fiduciary advice, carries liabilities for complaints and the costs associated with the FSCS and Fos.
Alternatively, if a mass market provider follows a clearly defined set of regulatory rules and acts in utmost good faith, it can provide financial advice which is deemed suitable. Advice given under the suitability rules would fall into a safe harbour, exempt from future complaints and liabilities, providing they can evidence good faith was maintained.
The key consideration in delivering financial advice to the mass market is cost. Financial advice at the point of sale in the mass market must be inexpensive to be effective. To deliver economical financial advice requires a blend of innovation with the reduction or elimination of regulatory costs.
After spending £1.7bn on the implementation of the RDR, how much the FAMR will cost and who will pay for it is unknown. The FCA has proven to be a very expensive way of delivering regulation in the UK; it may be the case the implementation of the FAMR requires a new regulator, not a new regulatory approach.
Richard Bishop is a lecturer in financial services at Coventry University College and a practising regulated financial adviser.
