Your IndustryMar 30 2016

Opportunity knocked

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Two weeks ago saw the publication of the Financial Advice Market Review and, in my view, the recommendations are a bit of a mixed bag – a couple of positive steps, some helpful clarificatory measures unlikely to change the world, and several missed opportunities.

The logic on the review’s analysis seems right to me: advice needs to be made more affordable, people need to recognise the need to manage and engage with their finances, and there needs to be a fair balance between liability and compensation. Unfortunately, the recommendations fall short of addressing these issues.

Firstly, the good stuff. I welcome the review of Financial Services Compensation Scheme (FSCS) funding as a potential concrete step in the right direction. The profitability of advice firms dropped substantially in 2015 on increased revenues. In my view, this is wholly attributable to the massive increase in FSCS levies. I recognise that the profits of advice firms are not a primary concern for the Government or regulator, but if firms cannot make a decent return, that sector becomes an unattractive business to be in – not a good prospect for encouraging firms to expand. I also think that there are interesting ideas in expanding the role of advice in the workplace. On the back of auto-enrolment, it seems a sensible place to start to talk to people about their money. I think we need to try different ways of engagement and promote what works.

Secondly, the helpful but disappointing. Clarification and guidance where there is uncertainty is always useful. However, I cannot see how it will change the cost dynamics of providing financial advice. Guidance is only guidance – it does not alter the underlying regulatory framework. Its limited impact is highlighted by the lack of action in respect of the Financial Ombudsman Service (Fos). My understanding of many firms’ concerns about providing a simple, focused or basic advice service is how they will be treated in the event of a complaint. More guidance will not change this. If the customer complains because they think the advising firm should have taken something into account or they thought they were being advised when they were only being given information – Fos will treat these just as they do now. I do not think that publishing data (which is already publicly available) or more roundtable discussions will address the issue of confidence in Fos. That is why the Association of Professional Financial Advisers (Apfa) believes there needs to be a change at Fos with the separation of the appeals process to an independent body. Scrutiny and transparency always improves decision-making. The right to appeal to a separate and fresh set of eyes is the cornerstone of judicial and quasi-judicial systems.

Lastly, there is a lack of action on a long-stop. Apfa has campaigned since 2012 for a better balance on liability. The case for rejection is based on an outmoded view of what advisers do. Since the retail distribution review, advice has been the product. It has a limited shelf life. A client can stay invested in a particular asset in perpetuity. That is not sensible. Review is essential. In an uncertain world, no adviser can be expected to have foresight for five, let alone 15, years. The Budget shows that the brains at the Treasury could not even manage to predict five months ahead with any accuracy.

The case for rejection of the longstop is based on an outmoded view of what advisers do

Overall, I cannot see how the package will address the challenges the review identifies. So I also think the commitment to keep progress under review is very important. I do not think there is any disagreement between the Government, consumer groups or the financial services sector on the desired outcome – better access to affordable financial advice. So if I am right, and these measures do not bear fruit, we will need to be reconsidering some of the ideas that have been discarded this time round and taking more substantive action in the near future.

Chris Hannant is director general of Apfa