OpinionOct 25 2013

FCA finally enshrining advice, but it must get balance right

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We’re through the looking glass on financial risk and living in the aftermath of one of the worst downturns in history. The population continues to descend ever deeper into a savings torpor that is catalysing a spiralling pension liability deficit.

Whether buying a house, making investments with accrued savings or embarking on a plan to ensure an auspicious retirement, speaking to a professional financial adviser should be enshrined as a way to ensure financial security and generate ‘bang for your buck’.

I’m sure at this point I’ll lose the goodwill built up in these opening paragraphs among a few readers, but I believe the Retail Distribution Review had the potential to help some way towards this laudable goal.

Through increased professionalism we should aim to put financial advice on a par with accountancy or legal advice, and transparent remuneration, if implemented correctly, should have helped to mitigate criticisms of the sector and foster trust between it and prospective clients.

Through increased professionalism we should aim to put financial advice on a par with accountancy or legal advice.

And, to be fair, surveys showing more people are likely to use advice for the first time and widespread reports of improved profitability for many firms across the sector suggest this is, at least to some extent, working.

More broadly however, it is hard to escape the feeling that our sector has been continually undermined by regulatory indifference in the past.

The Financial Services Authority, for example, made little to no effort to facilitate flexible advice mechanisms that might have improved access to advice for mainstream clients and reduce barriers to entry to the sector.

It generally took an officious and detached stance that all but destroyed the relationship between it and those it regulates, routinely failed to promote the importance of advice and, perhaps worst of all, consistently increased its cost burden with little regard for the effect on firms.

There has been a sense that things are changing under the Financial Conduct Authority, though.

Mr Wheatley just this week discussed the importance of shifting regulatory focus away from arcane compliance, and he has also previously sounded positive tones about web-based simply advice models to help offset the ‘advice gap’.

Yesterday (25 October) the regulator delivered its coup de grace of this new, adviser-friendly approach when it published a consultation paper on the emerging area of ‘crowdfunding’ that proposed firms must only market to non-sophisticated retail investors via professional intermediaries.

The reasoning is that crowdfunding - raising money for start-up businesses by collecting small amounts of money from everyday investors - is by its nature higher risk to due the nature of the underlying investee businesses, which are young, fragile and prone to failure.

All very reasonable in theory - and for advisers it is a powerful sign that the regulator is learning the lessons of the past (and no doubt listening to some of the worried discussions around advice that are beginning to circulate among Treasury Committee members).

In principle, therefore, I see this as positive. It is also undeniably disproportionate.

Most crowdfunding platforms offer investments starting at a micro level. Abundance Generation, for example, the renewable energy platform that is the first to be fully FCA approved, allows investors to contribute as little as £5.

With the best will in the world, no ‘investor’ needs advice on what they do with a fiver. Even investments in the hundreds of pounds are not worth putting through an adviser, whose charge to undertake due diligence on the underlying business would account for a slice of such an amount anyway.

It is where investments are larger and represent a substantive portion of a portfolio that advice should be demanded. The FCA has said that no retail investor should place more than 10 per cent of a portfolio into crowdfunding - anyone even getting close to this should be seeking support.

If it wants to mark a real departure from and avoid unflattering comparisons with its predecessor, the FCA must be proportionate in its responses to new industry developments and avoid being drawn into knee-jerk reactions and unnecessary absolutes.

Crowdfunding has the potential to offer a valuable, tangible alternative form of investment for retail investors that may otherwise be consolidated into the familiar larger institutions and funds in the coming years. It should not be asphyxiated by unnecessary red tape.

In its final rules I’d like to see the FCA continuing to promote the value of advice. Perhaps platforms should be required to signpost advice and explain why and when this might be useful - and the demand for advice could be retained for ‘larger’ investments (answers on a post card as to what this level would be).

I’m in favour of the principle of what the FCA has done here, but it must get the balance right.