The cost of advice also relates to the ever increasing cost of insurance should things go wrong, writes MRM's Havard Hughes.
With the FCA’s long anticipated sunset clause set to come into effect for platform cash rebates and platform services, many in the adviser sector are preparing to adjust their business model in time for the changes. The case against cash rebates, service charges and other forms of trail commission was strongly made by the FCA and its predecessor. The advice industry was insufficiently transparent and advisers were benefitting by way of commission long after the advice to which it was related was given. These principles have inspired the RDR, PS13/11 and MiFID.
When it comes to professional indemnity insurance there is no such thing as a sunset clause.
So far so good you might say. After all, with the sunset clause effective from the 6 April 2016 commission in all its forms will soon be ancient history. However, has the pendulum tilted too far against the interest of advisers in a way that actually leads to consumers not getting the advice they need? So stringent are the rules of the RDR and other legislative and regulatory initiatives that many have simply pulled out of the advice space altogether. With the end of commission, servicing many clients has just become far too expensive.
The cost of advice does not only relate to the need to fully understand the needs of the customer; it also relates to the ever increasing cost of insurance should things go wrong. When it comes to professional indemnity insurance there is no such thing as a sunset clause. Advisers remain liable for the advice they give long after the period of a normal contract. The argument goes that it is difficult to see whether advice was bad for many years after the policy was sold or the advice given. This leads to almost indefinite liability.
With the FCA in the midst of consulting on the Financial Advice Market Review the issue of a longstop on liability is explicitly raised. While it may offend the principles of some in the consumer movement who would like to see the entire industry punished indefinitely for the misdeeds of the banking few; surely there must be merit in redressing the balance? Either a limitation on liability of a safe harbour would go a long way to making the provision of advice economically viable again.
If it is right that they can no longer profit into the future for their advice then surely there should be a limit on the liability they face after the fact? Doubtless, a controversial perspective; but if it were to lead to greater availability of advice then surely there would be a benefit to the vast majority of people who currently cannot afford the advice they so urgently need? This is no longer the 1980s. Advisers are now subject to far greater scrutiny by the regulator and far more rigorous requirements in terms of continued professional development. In this new culture, surely unlimited liability should also have a sunset clause of its own?
To find out more about the sunset clause and how you can get ready download the Nucleus whitepaper, The sunset clause: making informed decisions.