Why you cannot ignore the Financial Advice Market Review
If advisers do not unite to ensure the Financial Advice Market Review does a proper job, argues Garry Heath, director general of new trade association Libertatem, then both they and consumers will be the losers once again
Do you hear that? That bizarre whining noise coming from Whitehall? It is Her Majesty’s Treasury waking up to the fact that 13,500 advisers have left the industry since the introduction of the Retail Distribution Review (RDR). The Treasury’s bright idea of pension freedom has been compromised by the regulators’ social engineering. Whoops – how did that happen?
It is not as if nobody told them. Contributors to the Treasury Select Committee’s report in 2011 were full of warnings. I rang the alarm bells in July last year and followed it up with the Heath Report Two in March this year. Both reports have been noticed all over the world – even the UN has a copy. But as yet I am still waiting for a call to go to One Horse Guards Road. Yeah verily – “A prophet is not without honour, but in his own country”.
|"Make no mistake, if RDR is really looked at in terms of loss of advice capacity, heads should roll."
Be very clear – the Financial Advice Market Review, launched last month by the Financial Conduct Authority (FCA) and HM Treasury, could go one of two ways. It could seek to discover the real reasons for the lack of advice, such as ever-increasing regulatory and Financial Services Compensation Scheme (FSCS) costs, the over-use of capital adequacy and the difficulty of recruiting and holding on to new advisers. In this way, the Review would deliver a practical and deliverable solution to the current advice gap. There are plenty of vested interest wanting to stop this but we must try.
Probably, though, the review will seek both to bury the past and to run a diversionary tactic by inflating the value and availability of ‘robo-advice’ and similar concepts. It will give banks and insurance companies the chance to re-enter the market – and they are in an excellent position to do so as they already have capital to develop new ideas. But may I suggest they should first be required to clear up the mess they made last time before being allowed to start a new one?
There is a second sound – this time of brushing. Tracks are being covered, excuses rehearsed and media schmoozed. In the context of the RDR, the regulator has been running more smoke than a World War II destroyer. Despite paying European Economics £147,000 for a report in praise of RDR, it received back a report that clearly opined there was no evidence of consumer benefit.
Loss of advice capacity
Make no mistake, if RDR is really looked at in terms of loss of advice capacity, heads should roll. The then Financial Services Authority ignored Parliament and the Treasury Select Committee, pressing on with a social engineering scheme, removing 13,500 advisers from the market and cut the capacity of those left by half. Some 16 million out of 23 million consumers, historically serviced by this industry, will no longer have access to advice.
If the review looks at why there has been such a drop in adviser capacity, I also expect alternative advice models to be paraded large and loud. Robo-advisers, cyber-paraplanners and ‘decision-tree huggers will be seen as the new solution – just as simplified advice was when RDR was debated in 2011. So much of this stuff is vapourware – products announced to much fanfare but never followed through – and yet there will be attempts to portray traditional advice as old fashioned and these new ideas as the solution.
Simplified advice and robo-advice are both unlikely to flourish for three good reasons. First, just because an IT wizard can invent a solution, it does not follow anyone will use it. We already have a number of IT-based investment start-ups and, while they make lots of noise, most have seen very little business and are years away from profit. It is still the case that the public are happy to use the internet for research, but very few actually want to jump off the diving board without a human instructor to give them confidence.
Second, unless we have stable and accountable regulatory system, new entrants will be the exception rather than the rule. Who would invest in time and effort creating a new distribution channel if there is no certainty that in five years’ time the regulator, or more importantly, the Financial Ombudsman Service will not declare the whole of your methodology to be wrong – in retrospect, destroying your company with innumerable claims? Third, mostly for the reason above, raising the necessary capital to develop new businesses will be difficult. Certainly, private equity houses look upon financial services regulation as eccentric and excessive.
If the Financial Advice Market Review is to have any value, it must look at the current regulation – its amount, its cost and the amount of time advisers spend satisfying regulation rather than advising their clients. It must look at the way the FOS works and bring it back to shadowing civil law rather than inventing ways to stoke the compensation culture. We also need to find new methods of paying the FSCS.
A clear signal
If the review is to succeed, first and foremost, we must have a clear signal from ministers that they value advice – particularly impartial advice. What I can see the review delivering, however, is a world in which the mass market is stitched up between government and the big players, leaving the impartial advisers to deal with the labour-intensive rich.
In recent weeks, Libertatem has been running a postal campaign among prospective members, focusing on the Financial Advice Market Review. We have seen an excellent result but there are so many more advisers still to join us.
If we unite we can construct a campaign to force the review to work properly by exercising Parliamentary and media pressure to stop it becoming yet another vehicle for the big battalions. I cannot guarantee we will succeed. What I can guarantee though is, if we do not try, we will lose yet again.
Libertatem is a new, non-profit trade association set up to represent financial advisers, planners and wealth managers across the nation with conviction and transparency