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.
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