Falling back or full speed ahead? FAMR one year on

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Falling back or full speed ahead? FAMR one year on

Final proposals, produced in March 2016, were somewhat underwhelming. This, it could be argued, was inevitable: there was no magic wand available to implement structural reforms overnight.

A year on from the final report, and levels of enthusiasm remain relatively low, but signs of progress are becoming apparent on a few fronts. As the FCA and Treasury, jointly responsible for the FAMR proposals, prepare to issue a progress report to economic secretary Simon Kirby and the FCA board, the outlook is finely balanced.

The recommendations

Responsibility for the 28 recommendations put forward in the review is split between the Treasury, the FCA, the Fos and the FAMR working group. 

With 11 recommendations to tackle, the FCA oversees the largest share of recommendations, while the Treasury is in charge of six, the Fos in charge of four and a working group in charge of three. Responsibility for the final four recommendations sits jointly with the FCA and the Treasury.

So far, few recommendations have had the opportunity to have an impact on the financial advice market. As Table 1 shows, just nine of the 28 recommendations were scheduled to begin last year, and many were simple objectives (such as the introduction of Fos roundtables with advisers) or the first steps towards future goals, such as the launch of the consultation on FSCS funding reform.

Other factors have also served to delay the potential impact. The two overseers of the review, the FCA’s Tracey McDermott and the Treasury’s Charles Roxburgh, have since left their posts. Mr Roxburgh remains at the Treasury in a more senior position, but the department would not be alone in believing that the newfound responsibilities of Brexit will supersede all other work in the coming months.

“As negotiations regarding the terms and conditions of the UK’s withdrawal from the European Union continue in 2017, a degree of uncertainty is likely to linger for some time yet”, says Keith Richards, chief executive at the Personal Finance Society (PFS).

Crunch time

Nonetheless, the bulk of the recommendations are due to be implemented in some form this year, as Table 2 shows. This could prove to be a double-edged sword for advisers. As much as they would welcome meaningful progress on many fronts, if FAMR is to succeed in its aims, the sheer weight of consultation and change being discussed and debated could prove to be exhausting. According to the PFS’s annual Member Survey, 75 per cent of advisers surveyed considered regulation and compliance costs as the “biggest threats to the success of business in the next one to three years”, compared with just over a third of those surveyed (34 per cent) who pointed to the UK’s withdrawal from Europe.

In general, progress remains slow. But one issue that has evolved swiftly is the introduction of the pensions advice allowance. Originally set at £500, an increase to £1,500 (split across three tax years) has been introduced less than six months later. But concerns remain about advisers’ ability to offer their services for this amount. 

Richard Freeman, chief distribution officer at Old Mutual Wealth and part of the FAMR working group, sees the new allowance as “recognition of the advice industry”.

Mr Freeman says: “I think, at last, we’ve got the Treasury, regulator, [and] everyone is aligned saying there is an advice gap, advice is a good thing, and recognising that consumers have to pay for it when they take regulated advice.”

However, despite the change, many advisers still consider the allowance to be restrictive, given the annual limit remains £500.

Simon Webster, managing director of Kent-based Facts & Figures Chartered Financial Planners, says: “It’s potentially helpful as an idea, but what the regulator doesn’t recognise is that every pension provider in the land has got to rewrite their software, re-calculate their sums, and do all sorts of things to work out how they’re going to provide for this marvellous allowance that the government’s just pulled out of thin air, with no consultation with the industry.”

While Mr Webster recognises that some advisers could provide some form of advice for £500, he doesn’t believe it will be enough “to make a huge amount of difference”. 

He adds: “We charge £250 per hour, but we’re chartered financial planners, so that gives [a prospective client] two hours of our work. That’s probably enough for a basic review, so you could argue that it has some advantages for some people.”

Old Mutual Wealth’s Mr Freeman contends: “It’s difficult to get full advice with £500 on its own. But now you’ve got access to probably close to £1,000 across a tax year, and perhaps a top-up in the future, I think it’s another good step. 

“A lot of our advisers are willing to sit down and have an exploratory meeting upfront that probably doesn’t cost £500, so I think we’re almost there.”

As well as in-person regulated advice, the allowance can also be used for robo or automated advice. However, as so few advice firms have the capacity to deliver such services, as well as the fact  the new advice definition has yet to be set, the likelihood of consumers using their allowance for robo-advice remains relatively low. 

Grey lines

The question of where to draw the line between guidance and advice, seen as crucial to closing the advice gap, encouraging innovation, and giving advisers piece of mind when it comes to interacting with clients, has proved difficult for FAMR to answer.

One recommendation made by FAMR, for the working group to publish a shortlist of potential terms to describe “guidance” and “advice”, was scheduled for the second half of 2016, but it has yet to materialise. 

Mr Freeman acknowledges that the definitions have proven to be “a much harder thing to define than we thought, especially for younger consumers” who “look at guidance and advice very differently to [those of us] who have been in the industry and are used to the term”.

FCA chair John Griffith-Jones also acknowledged the difficulties in a speech in February, saying the distinction between advice and guidance “once reasonably clear, has become much greyer with the advent of platforms and the potential of robo-advice”.

The Treasury launched a consultation on the subject last September, proposing to amend the definition so it is consistent with the terminology used by Europe’s Mifid II regulation, which is due to come into force on 1 January 2018. 

The consultation closed in November, but HMT is yet to announce its next steps. This may be a sign of the difficulties it is facing.

Billy Mackay, marketing director at AJ Bell, believes the complexity of the topic is being overplayed. Mr Mackay says: “I don’t think [the definition] is that difficult to pin down. In the Treasury’s March paper, they committed to saying that they would provide a definition, that it would be in line with Mifid and it would be based on requirements to provide a personal recommendation, so they’re already three quarters of the way down the path.”

But some advisers, such as Mr Webster, don’t agree. “There is huge confusion in the marketplace about the boundaries of regulated advice. And no wonder because politicians do not join the dots.”

The FCA has already tried to delineate guidance and advice once before, in a paper published in 2013, but its proposals were criticised for not being sufficiently clear. Perhaps with one eye on this, the Treasury’s September 2016 consultation said it would provide “illustrative case studies” to help advisers aid consumers who wish to make investment decisions without a personal recommendation – in other words, to provide guidance rather than advice to those consumers.

Other plans

But the use of illustrated examples has been derided elsewhere. FAMR also recommended improving and condensing suitability reports as a means of making them more accessible to consumers. Although an enduring issue for firms, some have questioned why the recommendation did not make mention of key features illustrations (KFIs), which often present difficulties for clients because of their complex format. 

“Why would you pull one away from the other? I would have thought that if you are dealing with advice, you have an aim of trying to provide people with information that allows them to make an informed decision,” says AJ Bell’s Mr Mackay.

Referring to KFIs as the “worst example of information overload”, he continues: “You should look at everything that consumers receive at the point of sale, surely. You put a bog-standard KFI in front of anyone and ask them to give a reaction, and they would say information overload.”

But the PFS’s Mr Richards believes the issue need not be confined to the FAMR itself. He says, “There is a strong argument that KFIs should be subject to the same level of scrutiny and review currently being undertaken for suitability reports. However, improvements can be made without necessarily expanding the scope of the FAMR.” 

One issue in which there has been positive progress is the FSCS funding review. Advisers are set to see their contributions to the annual levy fall, according to the proposals put out in a December 2016 consultation. The change is less comprehensive than some had hoped for, however – a product levy, which would see more responsibility fall on product providers, has been ruled out by the FCA. The timeline for implementing the proposed changes is also a lengthy one: changes will not come into place until 2018/19 at the earliest.

“The burden shouldn’t disproportionately fall on advisers. I am disappointed that it will take longer to bring this into force, but it is better that we get this right for a sustainable long term solution,” says Chris Hannant, director general of the Association of Professional Financial Advisers.

Two other important issues for advisers addressed by FAMR have even lengthier timeframes. The original proposals ruled out introducing a long-stop limit for referring complaints to the Fos, and said the issue would only be looked at again in 2019 as part of the wider FAMR review scheduled for that year. 

The other is the pensions dashboard. Here there was little expectation of a swift solution. Implementation may not take the decade predicted by former pensions minister Ros Altmann, but a target introduction date of 2019 remains some way off.

Last September brought fresh disappointment for some advisers with the news that building a prototype model would be the responsibility of providers alone: Aviva, Aon, HSBC, LV, Nest, Now: Pensions, the People’s Pension, Royal London, Standard Life, Zurich and Willis Towers Watson, under the oversight of the Association of British Insurers. 

Advocates say enabling consumers to view all of their pensions in one place would help encourage a savings culture and curtail some of the confusion that continues to exist around where or how to save for retirement. But some are concerned by the government’s decision not to force providers to get on board.

Even Margaret Snowdon, a member of the Treasury steering group overseeing the creation of the dashboard, has told the Financial Times that the government should oblige unwilling schemes to come on board by 2021, two years after the project is scheduled to be rolled out.

The first test for the dashboard is scheduled to arrive in March, when the providers present their prototype model to the industry. But true to form, this, too, could be subject to delays. 

A year on from FAMR’s original proposals, signs of progress are emerging, but advisers are yet to discover whether implementation will be a case of too little as well as too late.

kuba.shandbaptiste@ft.com