It is exactly four years ago that the Financial Services Authority (FSA) unveiled its finalised guidance on simplified advice, publishing it just nine months before the Retail Distribution Review (RDR) went live, but the guidance failed to do the job and simplified advice was never defined adequately.
During this period pre-RDR there was feverish discussion in the industry about how to define ‘basic’ (then associated with stakeholder pension products), ‘streamlined’, ‘simplified’, ‘restricted’ or ‘focused’ advice.
The only category of advice that made it through the regulator’s wringer that time round was restricted advice which, as we know, became the adviser category that those not prepared to commit to ‘full (whole of market) advice’ signed up to, while still being bound by the RDR’s higher training & competency regime and adviser charging.
Exit, stage right
Because simplified advice was never properly defined pre-RDR, and banks and building societies were facing an end to commission-based payments for advice (or was it actually guidance?) and a tougher enforcement regime post-RDR, they all started pulling the plug on their adviser teams as the liabilities and potential losses loomed large and their balance sheets were already severely damaged by the banking crisis and subsequent recession.
So much so that 44% of bank and building society-based advisers disappeared in the final three years before RDR. Barclays shed 7,200 jobs in this area in November 2012, while Santander, HSBC, Clydesdale, Co-Op and Yorkshire banks as well as AXA, also announced major layoff programmes during this period.
This was dramatic stuff as bank-based adviser numbers fell from more than 8,600 in 2011 by more than 75% to just over 2,000 by October 2014.
This reduction in numbers would have been bad enough but for the fact that the advice and guidance that the bancassurers provided was relatively low-cost and aimed at the mass market.
This part of the market was also rapidly abandoned by IFA firms, that now knew they had to be charging their face-to-face advice sessions at £150 to £220 per hour (with outputs from average meetings generating a total of five hours work, which needed to be charged back to the consumer very transparently) to remain profitable post-RDR.
Understandably, the market that all remaining IFAs now wanted to serve post-RDR were the few of us (probably about 850,000 of us, according to Cass Business School) who still had in excess of £100,000 of liquid assets to invest.
Any less than that and a typical advice session would probably cost more than 1% of investable assets, a painful threshold to cross.
The downturn also undoubtedly reduced people’s long-term savings pots and appetite for paying for financial advice, so that between 2008 and 2012 the number of us regularly taking financial advice more than halved, falling to just 12% of the UK’s working age population.
The Financial Advice Market Review (FAMR) needs to be seen in the context of the fact that both the Financial Conduct Authority (FCA) and the Treasury have been watching the banks exiting the lower-end of the advice market with mounting concern for a couple of years now; and the widening advice gap only got more worrying after George Osborne created a whole heap more need for pre-retirement financial advice when he unleashed ‘Pensions Freedom and Choice‘ on the market last year.
But does FAMR finally offer an adequate definition of simplified and/or streamlined advice which banks can use as the basis to start rebuilding their teams?
The jury is still out on this key question, but it is generally seen as a good first step. It certainly serves as a stimulus to get the banks back into the advice market.
What key FAMR recommendations are likely to get bank bosses interested?
1. Simplification of suitability letters
2. Streamlining of other customer-facing documentation (in consultation with the Financial Ombudsman Service)
3. ‘Nudging’ or guidance is encouraged (although it is unclear whether COBS 4 rules on financial promotions will still apply)
4. Streamlined advice is encouraged (but more clarity is needed here too)
5. Nudging services will be ‘sandboxed’ so there will be no levies imposed on banks during experimentation and regulatory approval processes
6. Option of funding pre-retirement advice via pension funds themselves is on the table
7. Project Innovate extended to help stimulate (and fund) automated robo-advice models
8. Trainee financial advisers can still operate under qualified supervision for 4 years
9. The Financial Advice Working Group will work with employers to develop and promote a guide to top ten ways to support employees’ financial health
10. Pensions dashboard offering access to information and valuation on all pension pots in one place online needs to be in place by 2019, potentially offering a major time saving to IFAs in terms of gathering data for several pension pots with different providers
The points in bold all seem to be helpful to banks and building societies planning their adviser team re-builds.
While others seem to tap straight into smoothing the path for light touch, online ‘robo-advice’ services. We can certainly expect more innovation and launches in this space as a result.
However, it also poses real dangers for the ‘business as usual’ advocates.
The danger for legacy product providers is that; as more people self-educate and self-serve through D2C platforms and new robo-advice offerings, and others go back to their banks for guidance, while still more look to gets to grips with the state of their often disparate retirement savings pots via the new pensions dashboard; all this activity is bound to trigger increased demand for retirement asset transfers.
Worse for providers is the fact that they will be expected to transfer assets in a more timely way, exacting much lower charges than they used to for doing so.
So as transfer numbers rise, costs being incurred by providers could rise exponentially. Early research found that a £50 cost per transfer could be hitting both the ceding and receiving insurer today.
However, for the oldest legacy plans, the costs associated with moving money may be far higher. It is certainly food for thought as the big boys begin to look at upgrading their legacy back book systems to enable them to offer pension freedom options.
They might also need to think about streamlining processes around transfers to ensure that the changes that are coming do not damage the bottom line.
Adrian Boulding is retirement strategy director at Dunstan Thomas
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