Millions of Britons are currently floundering in tempestuous financial seas, often prey to scams and rip-offs without access to regulated advice, presently the preserve of a few people in the know or those with substantial cash, (usually at least £50,000).
What this means is that nearly everyone is left to navigate choppy waters alone.
The right decision today could benefit everyone’s financial futures. Regulators: the ball is in your court.It is time for a new halfway house of foundation advice serving ordinary workers while protecting the high standards we have come to expect from most independent financial advisers, who give regulated advice with perhaps an extra-special quality kitemark, and more signposting and promotion of their virtues by the regulators.
The present system of an advice/guidance boundary, more or less in place since the introduction of the Retail Distribution Review in 2012, no longer works in my view.
Indeed, since then, George Osborne’s grenade of freedom and choice blew apart the whole edifice of the RDR and its rationale.
A new era of personal responsibility in retirement began in 2015 without either the regulatory framework or appropriately empowered institutions.
The burgeoning mass-market created by the auto-enrolment reforms has only compounded this "help gap".
Not before time, the whole murky boundary of guidance and advice is being revisited with a review underway by the Financial Conduct Authority and HM Treasury.
Not a whisper as I write has been heard from them on the outcome of their joint review on the advice/guidance boundary, promised for the autumn.
Pension neglect
The current guidance and regulated advice divide has led to millions neglecting their pensions during their working life for want of adequate communications and possibly making wrong investment and tax decisions, which companies are unable to correct as they fear straying into dangerous advice territory.
Not surprisingly, financial institutions are far too cautious about overstepping the mark as, quite rightly, negligent personal recommendations can lead to criminal sanctions or litigation.
But worse still, a help gap can leave millions seeking the illusory security of cash for the long term with their savings decimated by inflation.
Few do-it-yourself investors, even experienced ones, have any sophisticated concept at all of risk. They are either too gung-ho or risk-averse and need their hands holding, or at least more financial education.
The Pensions Policy Institute estimates there are currently just over 12m people in the UK at state pension age or older. This will rise to just under 16.5m by 2050, while the over-75s are set to increase by 50 per cent.
Older people are especially vulnerable and few take advice. With a majority retiring with decent final salary pensions, advice was just a "nice to have" luxury. Now, in the new defined contribution paradigm, it is almost an essential.
Without appropriate reforms from the FCA and Treasury, more pensioners will be scammed.
Scammers have no compunction about straying into regulated advice territory. If you make it hard to access regulated advice, too many unsuspecting individuals will simply fall into their lap.
The current divide serves these people poorly as the typical consumer does not have a clue about the meaning of advice and guidance and uses them interchangeably.
In research on consumer explanations of “advice” and “guidance“ prepared by the Financial Advice Working Group for the Treasury and the FCA in 2017 Nicky McCabe, chair of the advice and guidance sub-group at the Financial Advice Working Group for the FCA said: “Our research told us what consumers think about concepts of 'advice' and 'guidance' – namely that they are confusing and esoteric terms and don’t instinctively fit into the broad range of ways in which consumers look for help with their financial decisions."
The situation is even more opaque today. Frank and blunt advice is rare. The consumer also suffers because the regulator’s "perimeter" guidance essentially prevents firms providing information or help to customers that might influence their decision.
Tom Selby, head of retirement policy, AJ Bell, explains: “Clearly any communication which is personal in nature and based on something a firm knows about the customer could influence their decision, and therefore under the current rules and guidance could be deemed as being a personal recommendation.”
Selby continues: “Most firms will not go close to the advice/guidance boundary because of the risk of a [Financial Ombudsman Service] claim – a risk that is exacerbated by the existence of claims management companies who would likely try to bring significant group actions if a ruling found against a provider.”
He points out: “Whether or not there have been claims of this nature is immaterial – it is the risk that most providers have no tolerance for.
"And it would potentially only take one successful claim, exacerbated by an aggressive claims management company, to leave a provider on the hook for significant liabilities.”
Yet, squaring the advice/guidance circle bring huge benefits. Carried out prudently, it opens the door to specialised knowledge for all, previously denied them by cost and over-cautious regulation.
Another adviser, Alan Moran, chief commercial officer, Punter Southall Aspire, says hybrid advice could encourage competition between providers. He says: “This would lower charges, focus technology and we would – or ought – to see a real step forward in how the industry talks about this for even more people to understand more clearly.”
Consumers bamboozled
Since freedom and choice, the binary annuity choice has become myriad options, and the consumer is often bamboozled.
Yet Jenny Davidson, commercial proposition director at Quilter, says: “Each choice an individual makes along the way becomes critical, and the answers themselves are less obvious. How do you best invest your savings? Where is the best place for a rainy day fund? How do you want to take income in the future and what happens to your assets when you die?”
No solution is perfect, but a pragmatic halfway house with new foundational advice to suit the masses but retaining full regulated advice for the top decile could lead to better use of tech and more innovation.
There are dangers, so the FCA and regulators would need to work twice as hard to ensure an orderly and fair market. Otherwise, any relaxation could just be an excuse to push more product, and everyone could be worse off.
Change must come soon before today’s steady stream of retirees without final salary pensions becomes a raging torrent. The right decision today could benefit everyone’s financial futures. Regulators: the ball is in your court.
Stephanie Hawthorne is a freelance journalist
