The chief executive of the Financial Conduct Authority has said lower interest rates helped exacerbate the advice gap.
Speaking at Mansion House in London yesterday evening (4 October), Andrew Bailey said the advice market was a "major area of attention" for the FCA, saying it is now "crucial" given the greater flexibility available to people.
As he has done before, Mr Bailey said he was "quite prepared" to recognise that the Retail Distribution Review had helped cause an advice gap but he said it had been made worse by wider macro-economic issues.
He said: "I think that gap is probably exacerbated by low interest rates, which mean that the cost of advice looks less favourable when compared to returns.
"And this probably has more of an effect in areas where the fixed cost of advice – which is inevitable – looks unfavourable relative to the smaller amount of investment involved."
Mr Bailey said the RDR had other "sensible" outcomes such as prohibiting advisers from receiving commission and increasing the levels of professional standards.
He said the FCA is working on a number of initiatives which will help plug the gap, through Project Innovate, the regulatory sandbox and the Financial Advice Market Review.
He also revealed that the FCA will publish a strategy on pensions this year to address the "major regulatory issues" in the pensions sector at the moment.
Mr Bailey said: "In the provision of financial services, flexibility and choice can on occasion be the companion of complexity.
"To give an example, the transfer of a pension saving from a DB to DC scheme is one of the most complex transactions an individual can undertake, with a genuinely high degree of uncertainty around some of the key variables that drive outcomes.
"In our supervision work, we see good practice, and we see bad practice. We act on the latter."
Mr Bailey added that there was a "clear risk" that the savings rate for retirement is too low to meet people's expectations, which is compounded by low real interest rates.
He said housing could provide a solution to the long-term savings issue, saying it "makes sense" to look at its role as an investment.
Mr Bailey said: "The post-war model of saving to complete home ownership during the working life and then preserve it into retirement is becoming more flexible.
"We can see some benefit to this, and have made changes that help firms offer a wider range of lifetime mortgages.
"We think there is more we can do, and have published proposals that would make it easier to lend affordably to older consumers, with the borrower committing to pay the monthly interest and the loan eventually being repaid by sale of the property."
The other issue Mr Bailey discussed was consumer borrowing, which has increased rapidly but he said it was not a "material risk" to economic growth.
Consumer credit is expanding at a rate of about 10 per cent a year, with a total of £200bn presently on loan to consumers and businesses.
Mr Bailey broke this down as £68bn is credit card debt, £58bn is outstanding in motor finance and about £15bn is in various forms of higher cost credit.
Overdraft credit by the main high street banks is around £7bn. The rest is mostly unsecured personal loans.”
He said the lending is happening in a “generally benign” environment.
His comments echo those of Alex Brazier and colleagues at the Bank of England, who recently expressed confidence in the robustness of the economy, despite the higher debt levels.
Mr Bailey's comments also appear to defy previous remarks he made, in September, which called for government intervention in the consumer credit market.
The “robustness” cited by Mr Bailey could come under threat, from among other things, the Bank of England raising interest rates.
Members of the central bank’s Monetary Policy Committee (MPC), which sets interest rates, have been strongly hinting that rates will rise in November.
Fund manager Neil Woodford has shaped his £9bn Woodford Equity Income fund around the premise that the UK economy will perform better than expected by analysts precisely because lending is picking up, and that should boost consumption and growth.
Mr Bailey said lending products aimed at the less well-off and with low credit scores, “encourage over-indebtedness.”
He said that while there is plenty of competition in the credit card market, credit cards have become an expensive source of long-term debt for millions, a role, according to Mr Bailey, they were never intended to perform.
He said that while the FCA have introduced extra regulations on the credit card market, he does not feel introducing a cap on credit card charges is “practical”.
Such a cap has already been introduced in the doorstep lending sector, but Mr Bailey said it would be less effective for credit cards as they are a “revolving” rather than a fixed-term debt.
He said the FCA is currently consulting on providing more clarity for advisers on what is “general guidance” and what is “advice.”
This consultation is happening as part of the asset management review.
Mr Bailey said the more uncertain the boundary is between advice and guidance, the more rational it becomes for the adviser to avoid issuing guidance, which “is not helpful.”
He said: “My commitment is that the work on this important issue will go on until firms can operate successfully to the benefit of consumers using common sense and good rules of thumb.”
david.thorpe@ft.com
