RDR: Simplified Advice - May 2010


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With a mooted 30 million UK adults beyond the scope of full advice (consumers with less than £257 a month to save can’t be economically served by full advice) and only 18 months to go until final RDR implementation the industry got together to ask “ where on earth are we?”. After a spot of good old show and tell from the ABI, KPMG, the FSA and several providers, here’s the consensus…

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RDR: Simplified Advice - May 2010

  1. 1. RDR: simplified advice May 2010
  2. 2. RDR & simplified advice: 19 months and counting
  3. 3. No nearer a solution? Advisers and providers have complained that a lack of guidance from the FSA has held back attempts to develop simplified advice services. The lack of input from the FSA was a ‘dereliction of duty’, said Skandia chief executive Peter Mann. There is widespread industry complaint that the lack of clarity means it is near impossible to start developing a simplified advice process. The ABI has developed a proposal for a technology-based simplified advice service, which could serve the protection, ISA, annuity and group personal pension needs of the masses. Scottish Widows is one of four providers running an ABI simplified advice pilot but a big barrier to simplified advice is the level four qualifications requirement, which is making it an un-commercial venture. So with 18 months and counting, how much closer to a solution are we to a 30m (potential un- advised) problem?
  4. 4. RDR No turning back “ After three and a half years of discussion and “ consultation, we are finally nearing the end of the Retail Distribution Review journey. Following the publication of the advisers have until 31 December 2012 to implement these new rules in their businesses. The new RDR rules have been developed by the FSA to increase consumer confidence in financial advice by removing the potential for commission bias and increasing the professionalism of financial advisers.
  5. 5. RDR But not, yet, quite hitting the mark However, the new rules are widely predicted to reduce the number of financial advisers and increase the cost of advice. Evidence of advisers shifting their business models further up market, where advice is valued and affordable, can already be seen. This will increase and prevent a large number of consumers from accessing advice.
  6. 6. Accessing advice Consumer preference Consumers prefer to access advice through a variety of channels rather than relying solely on one source. Half of respondents who had sought financial advice used the internet. Fifty-two percent used a financial adviser, with an independent adviser more popular than an adviser linked to a product provider. Consumers who sought professional financial advice often supplemented this with their own research - consumers prefer to access information from sources which they believe are independent and impartial, like media and internet ‘best-buy’ tables, rather than using public sources like the Citizen’s Advice Bureau. Source: Q3 2009 ABI savings and protection survey
  7. 7. Accessing advice Important features Consistent with full / General Population Product features simple advice (mean score) Consumers generally prefer financial advice to undertake a comprehensive analysis of their financial circumstances and to recommend a product from a wide range. These features are likely to be associated with full advice delivered by a financial adviser. Characteristics associated with simplified advice were also popular with consumers, as a more economical and quicker alternative to full advice. Source: ABI & NOP , 2008 © Teamspirit 2009
  8. 8. Cost of advice By product Given the comprehensive nature of full advice, it is unsurprising that the time taken to deliver “ The time taken to deliver advice does vary by channel, with banks and building societies this is typically nearly eight hours. typically taking less time to provide advice than This is therefore reflected in the cost. “ independent financial advisers, primarily due to the nature of their service. On average, full advice typically costs £670 in total. Following the implementation of the RDR, this cost is widely expected to increase. “ The time taken also varies depending on whether the client is a new or an existing customer “ of the firm and by the type of product recommended. Source: CRA calculations May 2010
  9. 9. Cost of advice Calculated risk Based on the cost of providing full advice, the research has calculated the minimum case size which is profitable. On average, consumers with less than £257 per month to save or £13,730 to invest as a lump sum cannot be economically served by full advice. According to the research, over 30 million UK adults are beyond the target market of full advice. While not all of these people need full financial advice, a significant proportion could benefit from more economical financial advice which could help them protect their family and better save for the future. © Teamspirit 2009
  10. 10. Simplified advice Guiding principles Principle Stage of process Guiding principle The ABI has developed guiding principles for a simplified advice process. These are based around the key stages as shown in Table opposite. As part of this guidance, we have identified the Treating Customers Fairly outcomes and key requirements firms should meet to fulfil each principle. Source: ABI’s guiding principles for simplified advice © Teamspirit 2009
  11. 11. Simplified advice The scope To meet the advice needs of a growing number of consumers unable to access existing full advice, the ABI have been developing proposals for a new financial advice process, known as simplified advice. This simplified advice process is designed to meet straightforward consumer needs through a limited assessment of their financial circumstances to deliver a suitable recommendation. It is not designed to meet the full “ Any consumer who is beyond the scope of simplified advice would be filtered out of the process and recommended to seek a more appropriate form of “ range of consumers’ needs, but to provide advice on specific circumstances. advice (full advice or a Money Made Clear service) © Teamspirit 2009
  12. 12. Simplified advice Consumer targets The ABI has identified three groups of consumers who could benefit from a simplified advice process: 1 2 3 Consumers who Consumers who are Consumers who are recognise the need to already unable to access currently served by save and invest after existing advice services. existing advice services, using Money Made Clear, but who will be unable to but require further afford or will be unwilling advice to determine to pay for this following which product meets their the introduction of the needs. RDR.
  13. 13. Tenets of simplified advice Central to offering simplified advice at a price which more consumers can afford, is the process driven nature of the service. A simplified advice process is automated and IT driven which the consumer can access via the internet unaided, over the phone or face-to-face where a facilitator guides the consumer through the pre-determined questions. The whole interaction should take no longer than 30-45 minutes, significantly less than 7 hours 40 minutes typically needed for full advice.
  14. 14. Simplified advice Four barriers FSA Judgment FOS Judgment QCF 4 Charging-based uncertainty uncertainty Requirement remuneration Barrier Detail FSA Judgment uncertainty Uncertainty around how this will be judged, especially by FSA supervisors – the industry requires FSA general guidance to provide clarity. FOS Judgment uncertainty Uncertainty around how the Financial Ombudsman Service will judge any complaints – industry requires clarity that any complaints would be judged based on the limitations as explained to the consumer. QCF 4 adviser qualification requirement Current FSA proposals to require an individual facilitating the process to hold a QCF 4 qualification. May be an inappropriately high qualification level, as an individual facilitating a simplified advice process will be restricted to guiding the consumer through the pre-determined process. Charging-based remuneration for Current FSA proposals require simplified advice to operate an Adviser simplified advice model Charging model. This may discourage many consumers in the target audience and create consumer confusion.
  15. 15. Simplified advice Overcoming barriers FSA director of conduct policy Sheila Nicoll said that where simplified advice is delivered via an automated service, QCF level four may not be required: When asked whether the FSA accepts that a Last year, in CP09/18, we suggested that simplified advice process will deliver good, but not [QCF level four] standards should apply necessarily the best outcomes, Nicoll said equally to those giving simplified advice. The responses to this were divided, and we can see that there might be an argument in terms of proportionality. There is also a I have a lot of sympathy with that view, but question of how the qualification we have to decide what is meant by ’good’ requirements might apply in a simplified – I have no particular objections to that advice process that is fully automated. statement, however
  16. 16. The simplified process Consumer response The results of this research are positive, with 83% of respondents rating their experience as either very good or quite good. “ The research also found a significant proportion of consumers “ are willing to put their trust in a simplified advice process and believe it can help them identify and meet their financial needs. Source: ORC International © Teamspirit 2009
  17. 17. So what next? “ Although the advice landscape will undoubtedly change in the run up to the introduction of the FSA’s new RDR rules in 2012, consumer access to suitable types of advice is an issue that is predicted to grow as commission “ is replaced by transparent advice charges. Danger of falling short Working closer & harder As it stands, the FSA is in danger of It is therefore vital that the industry works failing to fulfill one of their objectives for closely with the regulator and the the RDR – enabling more consumers to Ombudsman Service to ensure have their needs and wants addressed. consumers can access suitable, affordable financial advice. Source: UK Structured Products Association
  18. 18. So what next? Views from the market “ The better off will pay for advice but the rest will need a value proposition. Cost reductions and “ 5-% are not willing to pay for advice. The 50% that are most are only prepared to pay £50 or tax incentives (unlikely!) will help. Key is less! Ongoing f2f is going to be seriously “ consistency and greater integration across the challenges. How can we expect to deliver “ industry and public sector anything more than remote / Ltd advice?. Adam Phillips, Financial Services Adam Phillips, Financial Services Consumer Panel Consumer Panel “ The simplified market is more likely to provide the right “ There’s no doubt that the economic wake-up call has opened solutions. But not necessarily a window but how closer are we the best for which you will “ “ today to stepping through with always need Face-to-face. workable solutions?. Peter Jolly, Assistant Robert Kerr, Scottish Director ABI widows “ There is certainly a market. We’ve got the name of that solution – ‘Simplified Advice’ – “ but we really need to get on with what it looks like. Fiona Fry, KPMG
  19. 19. So what next? This is make or break So we seem to be gravitating to an acceptance that consumers may not get the exact advice they need from simplified advice but would not suffer from being told to save more through an ISA. ‘We focus on perfect outcomes too much when it is not always possible’ was one of the central themes of last Tuesday’s conference, which has some interesting TCF implications reconciling the two could be a challenge if not managed carefully! Simplified advice, it seems, is a process, not a person. The role is really just a facilitator. So whether providers and advisers adopt the ABI’s decision tree model en masse or go their own route remains to be seen. All will be key in determining whether this helps achieve RDR aims of increasing access to advice or just further taints the industry!