ICAS response to Financial Advice Market Review consultation
The ICAS Pensions Committee has responded to the joint call for input from HM Treasury and the Financial Conduct Authority to their Financial Advice Market Review (FAMR) (October 2015).
HM Treasury and the FCA are running FAMR in conjunction with the HM Treasury consultation on public financial guidance the public consultation period for both closed on 22 December 2015
Read the full ICAS response
The advice gap
While the majority of consumers are likely to seek public financial guidance about their pension options, rather than advice, the extension of pension freedoms from April 2015 has increased the likelihood that consumers will also seek independent financial advice. However, following the implementation of the Retail Distribution Review (RDR), there has been consolidation in the advice market, with the number of firms with the capacity to give advice on pensions expected to continue to reduce further.
The advice gap could be reduced by reducing demand. This could be achieved by expanding the definition of guidance, and therefore the scope of public financial guidance, to a point which falls just short of recommending a particular pension decumulation product.
Independent financial advice is perceived by consumers as being too expensive and therefore not providing value for money. If advice is not priced correctly, advisors will continue to leave the market. ;Therefore, the government needs to revisit the advice model created by the RDR.
Retiring entirely on a defined contribution (DC) pension pot is not yet common but it will become increasingly so. Therefore, demand for both guidance and advice will grow and it is essential that the government has a long-term plan to ensure that demand can be met.
Advice on pension taxation
The Pensions Committee has a concern that insufficient attention has been given by government to how consumers access advice on pensions taxation in tandem with accessing public financial guidance, prior to making a decision on how to approach pension decumulation.
Tax advice is not a regulated activity and therefore can be delivered by unregulated advisors. Therefore, care will need to be taken if pension guidance services of the future sign-post consumers to tax advice. If sign-posting occurs, we recommend that consumers are directed to tax advisors who have signed up to the Professional Conduct in Relation to Tax guidance published in May 2015 by a number of professional bodies including ICAS.
Advice on DB to DC transfers
At present there is a requirement for individuals to receive appropriate independent financial advice on DB to DC transfers, where safeguarded benefits have a cash equivalent transfer value of £30,000 or less, but this advice can be ignored. The responsibility of pension scheme trustees or LGPS board members is to check that the advice has been received before releasing funds from the pension scheme: however, the content of that advice is not made available to the trustees. Therefore, there is a risk that at some point in the future, perhaps having ignored the advice received, individuals may conclude that they have made the wrong decision and seek recompense. Consequently, this is an area where regulatory arrangements surrounding advice must be sufficient to ensure that the advice is of a sufficiently high quality. Also, without advisor confidence in both the advice structure and regulatory arrangements, there will be an increased reluctance to provide advice and an upward pressure on the cost of advice reflecting the perceptions of risk held by advisors and their insurers.
Use of technology
Greater use of technology, ‘robo’ advice, has the potential to make financial advice more accessible and may also fill part of the advice gap. Technology can be used to deliver information through different media and could sign-post the consumer to more tailored on-line resources or to face-to-face advice. As the consumer journeys through the technology, he or she would need to indicate after each section that they have understood the information received.
The interaction of the consumer with the technology will create a verifiable audit trail which the advisor can rely on to demonstrate what has been delivered to the consumer. This approach could reduce the risk of miss-selling. However, a cultural shift towards greater personal responsibility for decisions taken would need to occur.
We are still in the early days of pensions freedom in the UK and as products develop there may be scope for technology to deliver market comparisons which consumers are sufficiently confident to rely on.
However, both technological change and cultural change will take time. The existence of new pension freedoms could provide an impetus for cultural change but the complexity of pensions does not favour the individual consumer, especially as the quality of the outcome may not be assessed for a considerable period of time.& In monitoring the impact of pension reform on levels of pension saving and pension outcomes, the government will need to consider at regular intervals whether public financial guidance and independent financial advice are meeting consumer needs.
Now that major reforms to our pensions system have been implemented, we believe it is an appropriate time for the government to consider setting up an independent pensions/retirement savings commission as a standing advisory body which seeks to achieve long-term stability for the UK pensions system and cross-party consensus. Long-term stability in pensions’ policy is relevant to the provision of independent financial advice and public financial guidance as it would help to build consumer confidence in these services.