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The UK's FAMR - what advisors are really thinking

Caroline Escott, APFA, London, 17 January 2017

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In this sweeping survey of the UK's Financial Advice Market Review, the senior policy advisor at the Association of Professional Financial Advisors (pictured) outlines the industry's attitudes towards the reforms.

Advisors have been hit with legislative change upon legislative change over the last few years. Successive governments have attempted to give individuals greater responsibility for their finances while also easing pressure on the public purse. Their initiatives have ranged from dramatic alterations in the pensions and savings landscape to a reform of the way in which higher education and long-term care are funded.

In addition to these, some policy reforms have been aimed specifically at the financial advice market, from Treating Customers Fairly (TCF) to the Retail Distribution Review (RDR) and most recently the Financial Advice Market Review (FAMR). Each of these initiatives has had some benefits, but all have made the market more and more wary of change.  For instance, the RDR helped raise qualifications in the advisory sector and improve the public’s perception of financial advisors. Similarly, FAMR recommended some positive steps such as reform of the funding of the Financial Services Compensation Scheme (FSCS), a pensions advice allowance and the encouragement of workplaces to become more involved in financial advice.

Why FAMR?

Parts of FAMR are necessary because of some of the structural problems created by RDR, which came into force on 31 December 2012. After that date, we saw a decline in the numbers of advisors, with those employed by financial advice firms falling in number from around 26,000 in 2011 to just under 22,000 in 2014. Advisors who were planning to retire decided to speed the process up and those who had no appetite for further examinations also decided to leave the industry. The banning of commission to advisors, although it removed any (perception of) conflict of interest, also caused many advice firms’ business models to shift towards the service of high-net-worth individuals, while also restricting other consumers’ access to advice. 

In 2014/15 the 'pension freedoms' and other government policies that gave individuals greater autonomy over their savings came in. Because of these, demand for affordable professional financial help shot up to unprecedented levels. Because of RDR, however, there was now a significant mismatch between the supply of, and demand for, advice. FAMR was the government’s attempt to reduce this ‘advice gap’ and focus on the affordability and accessibility of advice, as well as on the liabilities that advisors were facing.

A modest set of reforms

At the time, people in the industry suspected that FAMR might be ‘RDR II’ and might be similarly far-reaching in its scope, objectives and effect. The review and the recommendations set out in the final report, however, made it evident that this was not the case. There were some steps in the right direction, as mentioned above: the FSCS levy review (although we had already known that this was on its way); the new pensions advice allowance; the recommendations on tax relief for workplace pensions advice; and attempts to clarify the boundaries of simplified/streamlined advice. The ruling-out of a liability longstop, without due consideration for alternative proposals, was a retrograde step. Then there was a certain amount of ineffectual "tinkering around the edges," such as an exhortation to the Financial Ombudsman Service (FOS) to publish more data and talk to the industry more often. 

FAMR's achievements so far

It has been nearly a year since FAMR was published and there are two years to go until HM Treasury and the Financial Conduct Authority (FCA) must report on the progress of its implementation. What has been achieved so far? Well, there has been a flurry of activity since the report, but unfortunately the FAMR proposals themselves were so cautious as to limit its actual effect. Several promised consultations have been published (about the meaning of the phrase "regulated financial advice," the £500 pensions advice allowance, the FOS's approach to data publication and the FSCS's levy approach). We shall not see the results of these consultations for several months yet – such is the nature of the consultation process. The FCA has also set up its Advice Unit, although I do not believe that a move to more automated forms of advice is the solution to the advice gap that some believe it to be.

The end of 2016 also brought the long-awaited publication of the FSCS levy review, after intensive talks between APFA and the authorities about its scope. I hope that 2017 will be the year in which the FCA resolves to make far-reaching changes in this area; the current approach is unsustainable, unfair to advisors and does not allow firms to plan, invest or innovate in the kinds of ways that the government wants. Some of the options suggested in the paper look promising. Had they been in place five years ago, they would have saved advisors between one-third and 60% of the fees that they were paying to the FSCS. 

The FSCS review paper outlines 3 different options for reforming the way in which the scheme is funded and which kinds of firm (i.e. which funding classes) ought to pay more or less. Option 1 is perhaps the most radical and would, if it came to pass, reduce the amounts that advisers paid towards the FSCS quite significantly. 

Product providers would have to cover some of the costs that arose whenever a claim against an intermediary was successful. The paper says: “Bearing in mind firms' product governance responsibilities and the burden that has fallen on intermediary firms in recent years in funding the FSCS, we believe it is appropriate that providers pay additional contributions.”

With this paper, then, the FCA appears to have agreed with APFA’s arguments about the need not just to shift allocation but also for radical changes to cut the scale of the levies. There has also been much mention of the nature of the PII market in APFA’s discussions with the FCA and we would be keen to see the possible market review happen later in the year.

No "statute of limiations" for advice liability

One of the biggest disappointments of FAMR, as far as both the APFA and our members were concerned, was the FAMR team’s refusal to countenance a longstop of 15 years on liability for bad advice. The team justified this by saying that it would affect only a small quantum of cases. This missed a crucial point: the number of cases might be small, but advisors will now live in a state of perpetual uncertainty about their liabilities and this is likely to lead to stress. In our 2016 Cost of Regulation survey, 85% of advisors said that the absence of a longstop made them worry about their personal finances when they were planning their retirement. One-quarter of respondents to the survey indicated that they were likely to defer their time of retirement in order to pay professional indemnity insurance. APFA also thinks that FAMR did not spend enough time considering alternative options such as the socialisation of costs through the creation of a compensation fund. Indeed, no mention of this idea made it into the final report or any of the supporting documents.

At the wealthier end of the spectrum

In terms of the effect of FAMR on HNWIs, the review was aimed mostly at broadening access to forms of professional financial help beyond the usual advisor client base. In this sense, the advice market for the wealthiest individuals will differ little from the current set-up, although workplaces will have an opportunity to become more involved and the £500 pensions advice allowance will be of some significance for people who require advice about their retirement savings – at least, if they have not already sought it. Similarly, if the FSCS levies are reduced by fairer funding, advisors may choose to pass on these savings to their clients.  

If APFA has its way, the FSCS Review may also have some implications for those HNWIs who currently invest in non-mainstream pooled investments (NMPIs). At the moment COBS 4.12 (in the FCA's so-called conduct-of-business sourcebook) places a restriction on the promotion of NMPIs. Firms are only allowed to promote such products to HNWIs and certified or self-certified 'sophisticated investors.' We believe that the current regulation is insufficiently stringent as retail consumers are ending up with unregulated products and then claiming compensation. This has a knock-on effect for the FOS and FSCS fees, which are in turn translated into higher fees for clients.

Good regulation, bad products

We believe that the current regulatory regime should be tightened up so that retail customers never end up purchasing unregulated products. The rules in their present form allow HNWIs to purchase unregulated products but the mere fact of being wealthy does not automatically give someone the understanding or experience to deal with risky investments of this kind. APFA is arguing that the FCA ought to amend COBS 4.12 so that the exemption on the prohibition on communicating and approving NMPI-related financial promotions excludes HNWIs.

There has been a flurry of consultative exercises in FAMR’s wake, but much of the industry suspects that the review's momentum may be stalling. Some of this might stem from a realisation that the world has changed significantly since the final report. There is a new Prime Minister and a government with new, post-Brexit priorities, and nobody would be surprised if the improvement of people's access to financial advice were to slip down the political agenda. I think that some momentum may also have been lost because FAMR kicked several of the really pressing issues, such as a longstop on liability or the high costs of regulation for advisors, into the long grass. During 2017 we should at least see some progress on the subject of FSCS levies and other things, but in the FAMR final report both the FCA and HM Treasury promised to conduct a “review of the outcomes” in 2019 and it is to this document that APFA is already looking ahead. When it comes, we hope it will provide us with a good opportunity to push for the radical reform of the advice market that both advisors and consumers need urgently.

* Caroline Escott can be reached on +44 20 7628 1287 or at caroline.escott@apfa.net

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