Issues

Guaranteed Guidance to hit advisers firms in coffers.

8 August 2014

The most significant regulatory news of this week was the publication of the FCA’s consultation Paper 14/11 on Guaranteed Guidance which was timed carefully with HM Treasury’s declarations on the same topic published on Monday.

The idea of Guaranteed Guidance, given the swingeing changes being forced on the at-retirement market seems a good one. However it is now clear from a close reading of the FCA’s paper that larger IFAs will foot the lion’s share of a potential £30m bill.

As predicted in our last post, the Money Advice Service (MAS) and The Pensions Advisory Service (TPAS) will provide the Guarantees Guidance but the real surprise is that advisers, not providers will foot the majority of the bill.

The regulator says adviser firms which come under the FCA’s A13 fee block with annual income of more than £100,000 will contribute to the levy to pay for Guidance. Smaller firms which only pay the minimum regulatory fee today – some 41% of them – will not contribute. Deposit acceptors, life insurers, portfolio managers and investment fund managers will also contribute.

The final verdict on the split between these parties will be declared by October but there are 3 options mooted:
1. Base it on the regulators annual funding allocation which would see advisers paying 30% of the overall cost; with deposit acceptors paying 20%, insurers 17%, portfolio managers 19% and fund managers 6%.
2. Split the levy evenly between all parties – meaning each will pay 20% of the new bill
3. Allocate it in line with what retirement products and services consumer choose. This option (although the fairest minded of the lot) is also likely to be the most expensive and time-consuming to implement.

As we know all too well advisers have been squeezed very hard by increased costs associated with new regulation in the last few years. First there were the increased T&C requirements associated with RDR compliance. Then they saw increased Professional Indemnity Insurance; as well as FSCS levies rising at all-time highs (14% average last year, some reporting more than 100% increases); and increased Capital Adequacy Requirements. Most IFAs have been forced to focus on the higher net worth (£100,000+) clients, creating a widening advice gap which most of us are now in. Arguably Guaranteed Guidance addresses the widening Advice Gap….but Guidance is not Independent Financial Advice or anything like it, despite what the national media might have you think when reporting the changes in the last week.

Taking a step back to look at the resourcing of Guaranteed Guidance by TPAS and MAS. It is estimated that the two bodies combined handled around 100,000 calls last year. That figure could well quadruple in the run up to April 2015 and beyond. You only have to look at the media frenzy in the last week associated with Guidance giveaway. We also know that the baby boomer bulge are all reaching retirement age and up to 400,000 per year are likely to be in the market for at-retirement Guidance for the next 10 years or so. We now know that retirees can come back to these service providers as many times as they like. And when they find out the alternative to Guidance is paid-for advice – they may well keep coming back to MAS and TPAS to get all they can out of them. These organisations may well struggle to cope with demand.

And where does this leave adviser firms footing between 20-30% of the potentially rising bill? Well it leaves them having to increase fees to existing clients to help pay for the increased FCA levy. It sets up a dangerous cycle which pushes access to independent financial advice further away from the many and in the direction of the fewer that can still afford it.

The Chancellor rationalises by saying that financial advisers should see an upswing in demand for advice as Guidance gets them into the habit of seeking advice from someone who knows a little bit more about at-retirement choices than his mate down the pub. That’s as may be but the reality is that the average DC pension pot today is worth sub-£30,000. What’s to stop pensioners taking all of this out (providing they have spread their pots across a minimum of 3 policies), as they are allowed to with increased trivial commutation allowances, and blowing it on a new car (although with most pot sizes it won’t be a Lamborghini as some predicted)? At least the car dealerships stand to fill their boots post April 2015.

And what are the implication for providers? Well the announcement seems to clear the way for providers to focus hard on setting up blended at-retirement propositions and products that mix the certainty of guaranteed income of annuities and more flexible drawdown.

It may also mean changes to Statutory Money Purchase Illustrations (SMPIs). There are lots of references in CP14/11 to ‘signposting’ clients to Guidance for example. We anticipate that the DWP will consult the industry on further pensions illustrations later this year, perhaps after the FCA has published its Finalised Guidance on Guaranteed Guidance during October.

There is one small ray of sun shine for advisers which also emerged this week. It seems that DB scheme holders set to convert their policy to a DC scheme can only do so if they take regulated financial advice associated with the transfer.