Chris Pitt, Head of Market Analysis at tech and consultancy provider IRESS, considers the FCA’s latest pronouncements on pensions in the light of the FCA's latest pronouncements. And a rather counter-intuitive development from Oz….
In years to come, the UK financial services industry will look back on 2013 / 2014 as a watershed when fundamental market changes were unleashed.
2013 started, of course, with the introduction of the RDR, followed by the banning of rebates from fund managers to platforms and April 2016 being set as the date by which all trail commissions must cease. Through auto-enrolment the government has successfully started to “nudge” employees into making some provision for their retirement.
And still the pace of change shows no sign of slowing down…..
From April 2015, retirees will no longer have to purchase an annuity. They will be allowed to take their entire pension pot in cash and they will have access to free, independently delivered guidance to help them make more informed retirement choices. The FCA has also expressed a clear desire to see more innovation around technology-enabled advice. The creation of “Project Innovate” and the publication of a Consultation Paper around Simplified Advice shows a regulator with a taste for change and new thinking.
So how will all of these changes play out over the next 5 to 10 years?
Expect More Change
Initially at least, there will be a considerable raft of regulatory refinements as the inevitable un-intended consequences and misunderstandings of the new rules emerge. We have already seen the FCA issue a number of “clarifications” as the first stage of a more robust approach to enforcement, e.g. around the way in which adviser firms disclose their charging structures. We have also seen the rules around inducements and conflicts of interest being spelled out in no uncertain terms!
This pattern of refinement is also being witnessed in Australia, where the new Abbott government has proposed a significant rowing back on the Future of Financial Advice (FoFA) enacted by the previous executive. In essence, they are seeking to reduce the regulatory burden on the financial services industry whilst maintaining the quality of financial advice for consumers.
Key changes include:
- Eliminating the need for clients to physically ‘opt-in’ to continue receiving advisory services;
- Removing the need for advisers to produce a fee disclosure statement for clients acquired before 1 July 2013;
- A proposal to remove the ban on conflicted remuneration for generic advice;
- Effecting changes to the grandfathering provisions that will allow advisers to move more easily between adviser firms.
And one more surprise – see below…
But Back to the UK Scene
However, whilst refinements are to be expected with most new legislation, in the UK market there are some more fundamental forces at play.
As, adviser firms adapt their propositions to thrive within the new post-RDR world, many have realised that they cannot afford to service lower value clients and are focusing their attention instead on fewer, wealthier clients. With the banks having largely withdrawn from the advice market there are an estimated 5.5M advice ‘orphans’, i.e. clients that used to receive financial advice, that are no longer being served.
Addressing this “advice gap”, and persuading the majority of the UK population to make sensible provision for their future financial well-being, are now matters of a national priority. It is this backdrop that is driving many of the changes that we have seen from the UK government over the last couple of years.
How will the Advice Market Respond?
The upper- end of the market (servicing wealthier clients) is well-served and likely to become more competitive as the large number of existing players chase the relatively few (but still growing) number of HNW clients. Holistic, on-going, financial advice will continue to be the dominant service offering but other models will emerge, e.g. specialist, high-touch, one-off, scaled or transactional advice around a particular issue. There will also be a growing number of on-line, self-directed services offering more confident investors the ability to create their own financial plans and select their own investment portfolios against their goals.
The biggest area of change will be in the mass-market, i.e. rising to the challenge of delivering good-quality, consistent, guidance to people with less complex financial affairs at a realistic price in a way that an average consumer can both understand and implement.
Take the UK government’s promised free pension guidance service. How this is to be funded remains a matter for debate but it has now been confirmed that delivery will be via independent organisations such as TPAS (The Pensions Advisory Service), MAS (the Money Advice Service) and possibly organisations such as Age UK and the Citizens Advice Bureau. Initially, these services will only educate and point people in the right direction, e.g. towards a qualified adviser, a product provider or other retirement solution supplier. Some consumers will be happy to turn the fruits of their education into actions without further help, but many won’t. Which means that demand for realistically priced, retirement advice within the UK is set to increase.
Australia Upside Down
Interestingly, the ‘at retirement’ advice issue has also become a ‘hot topic’ within the Australian market – but with a rather different possible outcome. The Abbott government is actually considering a move towards mandating the purchase of annuity style products – which would mean it’s moving in the exact opposite direction to the UK government!
- The delivery of financial advice is clearly going through a period of significant change but there are two trends that are already clear:-Financial advice propositions are diversifying to meet the needs of different market segments. The on-going, holistic, “wealth management” proposition won’t disappear, but neither will it scale to the needs of the mass-market. A broad range of subject focused, semi to fully automated, time-bounded, lower-priced (or even free) advice services will emerge, and exist both separate to and together with existing advice models.
- Technology is (and will increasingly) become fundamental to every type of advice proposition. Whether it is being used to enhance the quality of service, drive down costs, improve consistency or ensure compliance, deploying technology to best effect will become a critical success factor.
Overall, the future for financial advice within the UK market is bright. There will be more people with more money needing more help. However, the way in which that help is delivered will be far more varied and more technology-enabled than it has ever been before.