Over the past few years, those providing investment advice have faced rising direct and indirect costs associated with regulation. The strain of these increasing costs have resulted in disquiet in the industry particularly regarding the large increases in the Financial Services Compensation Scheme (FSCS) Levy and the increasing number of Financial Ombudsman Service (FOS) complaints resulting in compensation being paid for historic advice given. These costs and concerns about mis-selling have resulted in many firms shying away from advice for less profitable clients.
The Financial Advice Market Review consultation paper, published yesterday, is explicitly looking at the how reducing the risks, uncertainty and costs for firms providing advice could play a key role in reducing the advice gap.
In particular the review is interested in:
- The impact of limiting certain liabilities for firms providing advice (including so-called “safe harbour” legislation)
- The impact of introducing a “Longstop” or limitation period for claims after a set time.
What to expect:
It’s clearly too early to say whether the consultation paper will result in any provision to reduce advisors liability for advice given in good faith, or whether there will be a time limit for any complaints about advice. If it does include such provisions then this will be viewed as a god send for advisors big or small.
Some of the implications of such a change could include:
- reduced likelihood of dealing with costly ombudsman claims
- potential for the FCSC levy to be reduced – which has risen significantly over recent years as a result of large numbers of complaints and compensation payouts for historical advice provided
- reduced risk of mis-selling – one of the key reasons that many banks and insurance companies have shied away from provision of financial advice to the mass market is the fear that should any products they provide advice for perform poorly, then they will be liable.
Such changes would be welcome in an industry under severe pressure through increasing regulatory and compensatory costs and would allow many of these players to focus more on providing better quality advice to their clients and on how they can grow their businesses.
One of the main beneficiaries of such changes would be the major banks, who over the last five years have largely moved out of provision for advice for lower value client segments. In fact, some of the banks are already considering or actively moving back into this market with both Santander and HSBC both indicating that they will be looking at provision of investment advice in response to the pension freedoms announced last year.
Any firms considering such moves will need to ensure that the provision of advice meets the conflicting priorities of meeting regulatory requirements and ensuring a low cost to serve. More importantly though, they will need to be accessible and affordable to customers – not an easy task. The winners from this equation will be those that can bring together a compelling, low cost, compliant proposition with the right balance between the provision of advice and the use of technology.