FAMR raises spectre of return to commission-based selling
Adrian Boulding - Retirement
Strategy Director at Dunstan Thomas
HM Treasury finally recognised that the so-called Advice Gap, that already existed pre-RDR, has widened considerably since 31st December 2012 when it unveiled its Financial Advice Market Review (FAMR) on 3rd August 2015. Interestingly, the last vestiges of a pre-RDR world will cease in just over two months’ time on 6th April 2016 when fund-based trail commission on legacy business stops being paid.
As commission income streams fell away and the increasing costs associated with the professionalisation of financial advice were felt, high street banks were quick to lay off their large teams of branch-based financial advisers. Nearly half of the FSA-reported 8,658 bank-based advisers that were employed pre-RDR had been made redundant by March 2013. Further cuts from the likes of Santander, Yorkshire and Clydesdale Banks later that year saw bancassurer adviser numbers fall to less than 2,000 by the end of 2013.
It was the loss of these previously commission-based, sales bonus-induced, tied or multi-tied advisers that exacerbated the advice gap which already existed well before RDR came along. The FCA has been looking at the problem for some time prior to Financial Advice Market Review (FAMR) being launched last summer. For example, there were several failed attempts to define Simplified Advice.
However, what really made the advice gap a problem that needed fixing was the arrival of HM Treasury’s Pension Freedom and Choice at-retirement reform in April 2015. This broke the chains of annuity purchasing at-retirement and offered all over 55-year olds the option of cashing in their pensions savings or buying more flexible retirement income products. The free guidance provision that was hastily wrapped around this change is still attracting a great deal of criticism (and not a lot of use) so there is a real risk that the Government will end up with egg on its face if large numbers of retirees make ‘freedom-inspired’, poor financial choices without the aid of affordable financial advice.
That’s why the regulator, prompted by HM Treasury, felt the time was right to solve the now yawning ‘advice chasm’ being opened up by record numbers of baby-boomers casting a fresh eye on the possibility of cashing in their retirement savings without consulting an adviser.
The results of FAMR are due to be published just before the next Budget on 16th March so the clock is ticking. But what brought FAMR back into the headlines this week was the acting chief executive of the FCA Tracey McDermott’s announcement, live on Radio 4’s Money Box over last weekend, that a return of commission-based sales of regulated products is being considered as part of the latest review, although she was quick to note there would not be any reversal of the RDR.
This prompted howls of derision from the IFA community as well as Money Box presenter Paul Lewis himself. Surely the removal of commission-biased advice was the best thing that came out of the RDR and to reverse that is to ‘throw the baby out with the advice gap’, so to speak?
Are we really heading ‘back to the future’ as one Professional Adviser blogger and chief executive of Sandringham Financial Partners, Tim Sargisson, recently commented? This is a scary prospect for the whole industry, not just IFAs who have had to re-design their whole business models and ways of working to continue operating profitably in a post-RDR world.
Spare a thought for providers. They will have to run two admin systems side-by-side, generating different illustrations and projections for retirement: the first for products attracting commission payments to advisers (initial and/or trail?) and a second for full fee payment-based products. Legacy book migration programmes will have to go on hold or be reversed midstream. Admin costs will mount and these will eventually have to be passed back to the customer.
So the Treasury and the regulator need to think twice before turning the clock back, regardless of what type of financial products it is considering for this change, because they may unintentionally push the market backwards. As Paul Lewis noted, it seems like an interesting coincidence that Santander; the very bank that was quick to exit bancassurance back in February 2013 and was fined over £12m by the FCA for giving poor investment advice to its customers just over a year later; has decided the time is right to re-enter the market – hiring 225 advisers nationwide over the next couple of months.
Where Santander goes other major banks will follow. The FCA needs to be careful not to undermine the one thing that the RDR can be judged to have successfully achieved – professionalising the world of financial advice and rooting out sharp, commission-driven practice which generated poor outcomes for consumers. Above all we need a solution that works in the long-term interests of the consumer (rather than just delivering a short-term benefit to a salesman) as retirement savings are a very long-term commitment from those putting the money in.