The CISI has formed a two-part response to the call for input into the Financial Advice Market Review (FAMR), following consultation with a number of individual members who are advisers
The CISI is an FCA-accredited body for issuing Statements of Professional Standing to individual advisers under the Retail Distribution Review (RDR). It welcomes the Treasury and the FCA's initiative in the Financial Advice Market Review (FAMR), particularly in considering what needs to be done to enable consumers with smaller resources and income to have access to the high quality advice that they need, and in removing the barriers which restrict advisers from providing it. The Institute's response to the Treasury/FCA's call for input is in two parts – first the response to the few questions that relate to it directly as an accredited body (this response), and second, the answers of a select number of active committees of individual members of the CISI who are advisors (see Appendix 1).
Main comments
The first goes to the heart of addressing the mass market 'advice gap'. The cost of good quality advice must be reduced to a level that consumers with smaller assets can afford. There are two ways of achieving this: first, to encourage advisers to use technology to help (not replace) them (such as artificial intelligence), and second, to encourage advisers to provide advice through reducing the suitability requirements for advice on smaller amounts into less risky investments, reducing the cost to advisers so they can lower their charges.
The second is the need for those individuals providing advice to consumers to be suitably competent (including qualified) for the appropriate product or service. This means selecting the right level of knowledge and qualification to take account of the product or service's complexity and riskiness. The CISI applauds the innovative regulatory approach of the FAMR in opening up discussion on having different levels of suitability requirements, and proposes that the same approach should apply to qualification levels.
A further comment is the need for simplifying the different types of advice described in the FCA's paper FG15/l. While the CISI sympathises with the legal constraints under the Financial Services and Markets Act 2000 (FSMA) on the FCA, it has both confused advisers and discouraged innovation. Competence and qualifications requirements will need to be adapted according to any new classification.
Another point is on the new channels of delivering the advice to consumers. These include so-called machine delivered or 'robo-advice'. The CISI agrees that it is irrelevant which method is used to deliver the advice - there should be the same focus (and consistent criteria) on the nature and quality of the advice given. This also has consequences for competence and qualifications.
The CISI would be happy to participate in discussions and round tables in developing these, and other ideas under the FAMR, further.
Answers to specific questions
22. Do you agree that we should focus our initial work on advice in relation to investing, saving into a pension and taking an income in retirement?
The CISI agrees that these are the main areas of the advice gap.
The ones that members have chosen cover a range of complexity and riskiness for consumers. For example, advice on taking an income in retirement now has a long list of options, from withdrawing a substantial amount of capital from a pension pot and possibly investing it in a myriad of assets, to living on income from the pension pot alone. Conversely, advice on investing may be much simpler and less risky, so both duties of suitability and level of qualifications should be set at the appropriate level. (Currently the RDR qualifications are at level 4 – equivalent to the first year at university). This level may be right for advice on investment into retail investment products (largely funds) but too low for advice on complex products and services such as financial planning, where level 5 or even level 7 (first degree level) may protect consumers better.
The CISI notes that varying the qualifications level should improve the quality of advice without creating a cost barrier to the customer.
The members' comments in Appendix 1 contain a number of additional points.
23. Do you agree that we should focus our initial work on consumers with some money but without significant wealth (those with less than £100,000 investible assets or incomes under £50,000)?
The CISI does not agree. However, it understands the logic – that those with less are unlikely to be able to afford advice and therefore need to obtain it from the Money Advice Service or Pension Wise; and those with more assets can afford to pay an adviser who will welcome them. However, this approach does not take into account the nub of the 'advice gap'. This is caused by advisers' charges – they are simply too high for consumers with smaller assets. So the focus of the initial work should be on how to reduce these so all can afford them.
There are two main ways in which this can be done. The first is to strongly encourage advisers to use the technology now available to assist them in providing their services; to take out much of the routine tasks in research, product selection, order execution and settlement and trade and transaction reporting – leaving the adviser free to do what he or she is best at: understanding what the client wants and giving advice. There are a host of business services and business models that currently exist for these purposes. This is the enhancement of the advisor's role – not his or her replacement – as in pure pre-programmed delivery of advice.
The second is to reduce the regulatory risk and compliance costs of the adviser. This primarily springs from the duty of suitability. The latest thematic visit report reinforces the message that there is no proportionality in the duty, resulting in excessive compliance costs and high professional indemnity insurance (PII) premiums for advice to clients with smaller assets (see Appendix 2 below, on PII costs, and the answer to question 35 in the members' comments in Appendix 1) and in the FSCS levy (see Appendix 2 also) – which is now being studied. But this is strange – the duty should be based upon the complexity and riskiness of the product or service. Would a client with more assets be entitled to a higher duty of suitability from his or her adviser? The illogical conclusion is that smaller clients receive no advice at all – because it is made too expensive. As a precedent, there is a clear contrast with the regulation of gambling – or lack of it. See Appendix 3 which describes the CISI's research on this. It raises the question as to why less risky forms of investment should be as heavily regulated as they currently are.
The same analysis would apply to qualification levels. These should also be based upon the complexity and riskiness of the product or advice. Level 3 (first year undergraduate level) is really too low for an adviser to understand, and be an expert on, the complex and risky products on which he or she advises.
Therefore the CISI recommends that there should be no financial amounts taken into account for the initial work as proposed in the question.
24. Are there aspects of the current regulatory framework that could be simplified so that it is better understood and achieves its objectives in a more proportionate manner?
Yes. The FCA’s guidance on advice lists no less than seven different types, ranging from regulated advice (personal recommendations) to unregulated generic advice. While the CISI appreciates that the FCA's flexibility is limited by the Regulated Activities Order (which is sometimes super-equivalent to the Markets in Financial Instruments Directive (MiFID)), it does seem that dividing different services into further increasingly small and technical definitions not only prevents consumers receiving advice, but also frightens off providers (sometimes innovators) which are unsure where the boundaries are, and are concerned by the risks of getting it wrong (or the policy changing). Logically there should only be two categories: services which are regulated, and those which are not. The FCA should be clearer in guiding service providers as to which category their particular service comes into.
There is also a more significant argument for updating EU and UK legislation away from the 'personal recommendation of a specific investment' definition to a more detailed one from the European Securities and Markets Authority (ESMA) or the FCA which addresses modern services, eg, model portfolios and establishing the principle that it is the nature of the service delivered that is relevant rather than the method of delivery, eg, pre-programmed delivery. ESMA's proposal in its final report on MiFID II to examine this point at MiFID II, level 3 is a good one and should lead to revising the Committee of European Securities Regulator's guidance on the subject.
From this there will be changes to competence requirements under the RDR qualifications and continuing professional development (CPD) and under ESMA's level 2 standards on adviser's qualifications and CPD under MiFID II.
35. Do you have any comments or suggestions for an alternative approach in order to achieve an appropriate level of protection for consumers?
Yes. The key is the competence and knowledge of advisers. The RDR took this approach through requiring all retail advisers on retail investment products to be assessed for their fitness and competence, including having appropriate qualifications and CPD. There is a balance to be drawn between making entry easier for advisers and protecting consumers. The CISI would strongly support the continuation of the RDR approach so that consumers are protected from acting on advice (of whatever type, be it focused, simple or full advice) from individuals who are not trained or competent to give it. Which is more damaging – no advice or bad advice? The CISI suggests that bad advice inflicts more damage. Look at the risks of unregulated investments and poor financial planning . This goes to the very core of investor protection in the regulated environment – the FCA's statutory objective.
See also the answer to this question in the members' comments in Appendix 1 on longstop (questions 32–35).
Appendix 1
Members' views
Appendix 2
Professional indemnity insurance costs
Howden Insurance Brokers (who claim to be the leading broker arranging this cover for retail advisers): "Due to the frequency of negligence allegations made against financial advisers and some large instances of fraud since 2011, PII for the sector [retail advice] has become both increasingly difficult and expensive to secure.
"While there are some firns that continue to benefit from broadly stable insurance rates, the breadth of cover available may have constricted significantly over the past three years, posing a potentially greater threat than a rising PII premium."
The Financial Services Compensation Scheme levy
In April this year, the FSCS announced its levy for 2015/2016 – £319m compared with £276m in the previous year. Of this, £l00m applies to life and pension advisers.
Example of a specific firm (cited by FT Adviser): "Despite this conservatism [of business model] it has just had to hand over a cheque for £10,418 to the FSCS. Last year, the bill was £5,279. FSCS costs alone now consume 5% of Blackdown Financial's turnover."
Appendix 3
The CISI's survey on gambling