In advance of this year’s planned Financial Conduct Authority (FCA) retail distribution review (RDR) and financial advice market review (FAMR) post-implementation reviews, it is a good time to take stock of the current state of the UK financial advice market.
The FAMR was in part driven by the unintended consequences of the RDR, i.e. a financial advice sector that is underserving the needs of the less affluent population of the UK. To date the FAMR (just like the RDR) has not been as successful in achieving its objectives as we had hoped.
One example of this is the subjectivity required when interpreting the difference between advice (i.e. a personalised recommendation) and guidance (i.e. information aimed at assisting customers to make informed decisions).
We have specifically seen this manifest in the recent defined benefit (DB) transfer related policy statement (PS18/20), which aimed to provide clarity over exactly ‘what is and is not advising on conversion and transfer of pension benefits’.
As a result of this publication, some firms stopped providing their ‘triage/information-only’ service due to the perceived risk of inadvertently crossing the advice line. This is a conflict of interest between the adviser and customer the FAMR was aiming to address.
One of the main areas of debate in advance of PS18/20 related to contingent charging. This was due to the perceived conflict of interest that this presents in the advice process, one of three primary areas of focus RDR was meant to address. Once again it was concluded (rightly) that it would do more harm than good to remove this as a means of funding financial advice.
The final observation relating to DB transfers is the apparent contradiction between the FCA’s two DB reviews. Its findings last year from a thematic suitability review of 700 firms and 1,100 files found clients are broadly receiving good advice, albeit more needs to be done in respect of the disclosure of charges. However, its recent notification on DB transfer advice was not nearly so positive, finding fewer than half of cases to be suitable.
There is a real question here as to how this apparent discrepancy can be so significant – more to follow on this in 2019?
Pros and cons
The need for financial advice has never been greater as a result of a multi-trillion-pound savings gap and debt mountain. Yet despite this the offering to clients has significantly reduced. The business models of some adviser firms have become overly complacent resulting in a genuine need for true innovation. This was the great hope of the FAMR, which so far remains somewhat unfulfilled.
An example of where we appear to have gone backwards despite the RDR and FAMR is in relation to the status of an adviser. In the 1990s and early 2000s a tied adviser advised on the single product line offered by that provider or bank and an IFA offered products from the wider market. Simple.
But 30 years on are we (and more importantly, customers) clear on the difference between independent and restricted? This is further complicated by the fact the gap between an independent and restricted adviser can be an inch or a mile (i.e. as little as one product or 5% of the market).
But it is not all negative. If you ask advisers, a significant majority would say life post-RDR is better and it is certainly easier to make a decent living.
There is also currently a highly competitive market for practice buy-outs. Big nationals are looking to build market share and the remaining smaller firms are joining forces to protect themselves and build regional scale.
Given the size and needs of the UK market, there has never been a better time for financial advisers. Unlike many mature retail markets, there is more than enough to go around.
The direction of travel currently being taken by the FCA, to focus on culture as the primary driver for managing conduct risk, is hugely positive for both customers and advisers. In short this means being clear on your target market, understanding their needs and offering services that intrinsically deliver value.
As FCA chief executive Andrew Bailey has repeatedly stated over the past 18 months or so, the FCA has finite resources and so needs to focus on those who need protecting: the most vulnerable.
As part of its focus on competition, the FCA will continue measuring value for money with targeted market reviews (including distribution chains) and we expect this to also include a focus on product governance frameworks. However, this will need to be balanced with the resourcing challenges presented by Brexit and the senior managers and certification regime.
Andy Sutherland is managing director of advisory services at TCC