Over-regulation has long been discussed and debated in the financial advice sector, with spiralling and unpredictable regulatory costs a common complaint from planners and advisers.
What many often forget to consider in this debate however, is the impact that over-regulation has on the end user – advised clients and members of the public.
When I hear stories like the recent adviser who saw his total FSCS and other regulatory fees and levies jump by an astounding 400 per cent in just one year, I immediately think of the impact this has on the cost of advice for clients. This uncertainty broadens the advice gap and in many cases excludes the more vulnerable in our community from the professional advice that could potentially secure them a more financially secure future.
The Retail Distribution Review was designed to influence competence, behaviours and transparency, as well as reduce conflicts of interest, but the unintended consequence is that the regulatory pendulum has swung too far.
This is particularly evident post pension freedoms. Over-regulation has limited elements of the new pension environment and is counter-intuitive to the flexible marketplace the government was seeking to create. A more effective approach would be to educate consumers about their pension options by encouraging them to seek regulated professional advice.
The government’s recent decision to scrap the proposed secondary annuity market represents a collaborative response following input from the advice profession based on the consumer’s general best interests. The alternative would have been to create a complex and confusing market, requiring excessively bureaucratic regulation in order to protect those wishing to sell their annuities.
The secondary annuity proposal had attracted a limited appetite from advisers, who were in large part concerned about unsuitability and the risk of future liability. Insistent clients remain a major concern for advisers, who in many cases are refusing to action client requests that are contrary to a personal recommendation to protect the best interests of the client and maintain the integrity of professional ethics. Consumers who were promised greater freedoms are being held back by regulatory constraints, but there is no question that mandating professional advice within legislation was the right thing to do.
The FCA recognises there is work to do. For example, I’m optimistic that the regulator’s current review into FSCS funding, which is also expected to address the shortcomings of the professional indemnity insurance (PII) market, will deliver an outcome that offers certainty for both advisers and consumers.
Currently, PII insurers can mitigate liability or over-exposure to risk by amending or even withdrawing cover, unintentionally exposing advisers to the full cost of unforeseen compensation claims. Together with the unpredictable costs of FSCS, regulatory costs and liability are acting as a barrier for new entrants into the regulated advice market, which in turn limits competition and access for consumers.
The Personal Finance Society has proposed a single client protection fund, incorporating both the current PII and FSCS contribution. A combined fee would provide certainty, and it is arguable that a single contribution to a non-commercial ‘pooled risk’ fund, with an excess applying similar to PII, would reduce the current FSCS and PII costs. These benefits would inevitably be passed onto consumers.
The FCA is also acting to improve burdensome suitability reporting requirements.
Originally, suitability letters were a simple way of advising clients about the solutions they had acquired. Unfortunately they have evolved into a necessary evil for advisers, used in many cases as a way to show that a client has received full and proper advice, and as a measure to protect the adviser from the risk of future complaints.
The regulator believes that it is industry that has over-engineered the requirements but many advisers are so concerned about the risk of future complaints, that they’re including information that is aimed at protecting themselves rather than necessarily adding value to their client. The suitability reporting process has in many ways been hijacked by compliance experts.
Consumers cannot be expected to read and understand all the technical terms in these letters and a more consumer-centric solution must be found – one that eases the regulatory burden on the adviser, and which delivers clarity and peace of mind to the client.
The interests of today’s professional advisers are aligned with the interests of their current and potential clients, and it is time for the regulatory framework to acknowledge this. We already have regulations that require advisers to treat customers fairly. It is time to put faith in the profession to deliver an innovative and accessible service that all consumers value and trust.
Millions of consumers are vulnerable to mis-buying, unregulated activities and scams – balance needs to be restored.