Backstage with Keith Richards – May 2019
08 May 2019
28 May 2019
The Personal Finance Society’s CEO Keith Richards discusses challenges facing the financial advice sector in 2019 and provides an update on current Personal Finance Society initiatives.
Personal Finance Society Engagement Regarding PII and FSCS
“Professional Indemnity Insurance rates have been hardening over the past year following concerns over the suitability of defined benefit (DB) pension transfers and have recently been further impacted by the FCA’s decision to double the Financial Ombudsman Service (FOS) compensation limit from £150,000 to £300,000.
We wrote to the Chief Executive of the FCA on 27th March expressing concerns and highlighted the evident impact of compensation limit changes, calling for FCA guidance for the sector ahead of the 1st April implementation date, especially for firms who were struggling to get confirmation from their PI Insurers or secure appropriate cover which would have resulted in a breach of FCA rules. The FCA subsequently sent a communication to all firms on Friday 29th March clarifying the position.
The negative impact on the sector from both a financial and operational perspective is clear to see and is likely to place greater pressure on an already broken Financial Services Compensation Scheme (FSCS) if proactive action is not taken to address the matter.
We had also previously written to the Chancellor, Phillip Hammond on 30th January to again raise concerns from a consumer and sector perspective. Indeed, the restrictions caused by a hardening PII market, coupled with an increasing number of advisers who are understandably choosing to steer clear of DB Pension transfer advice, jeopardises the public's rights under pension freedoms and may force government to make further legislative changes. We have offered government a suggested solution which we feel would address the current issues and I attended a meeting at the Treasury’s offices on Wednesday 1st May to discuss further. A follow up meeting has been agreed.
The core principals and objectives of the government initiated Financial Advice Market Review (FAMR) to increase access to advice are also conflicted in our view and there is now an opportunity for every member of the profession to provide considered professional feedback to the FCA’s latest consultation - an opportunity to influence rather than vent frustration.
Call for PII evidence
We would like to gather additional tangible evidence of the impact that the current climate is having on firms and would therefore appreciate your input by forwarding relevant details via the firstname.lastname@example.org.
Our letter to Rt Hon Philip Hammond MP, Chancellor of the Exchequer included the following:
Proposal for a Savings and Investment Monetary Protection and Education Levy
In 2016 the Financial Advice and Markets Review found that, ‘the unpredictable nature of the Financial Services Compensation Scheme (FSCS) levy makes it hard [for firms] to plan effectively.’ It also reported on ‘problems which smaller firms experience in obtaining adequate PII at an affordable price.’
Two years later, as the first compensation payments start to be paid in respect of the British Steel pension scheme saga, these problems remain and the evidence of the PII market hardening clear to see, as insurers react to their perception of the risks involved (limiting cover, applying exclusions, offering commercially unacceptable terms). Such reactions, whilst understandable, are leaving the adviser market exposed and in respect of safeguarded benefits increasingly denying the general public access to pension freedoms which threatens the future of Pension Freedoms more broadly.
The FCA’s review of FSCS funding has gone as far as it can without making changes to primary legislation, but the FSCS, as well intentioned as it is, was designed at a different point in time and has built up an unknown level of legacy liability over many years. It is increasingly proving unfit for purpose and the growing concern over DB transfers is likely to compound the level of liability placed upon it, which will result in poor outcomes for consumers and the market.
We believe that the time has come to look at a more broadly-based solution, combining fair sustainable and cost-effective levies covering both consumer investment compensation and funding of a public financial education programme led by the new SFGB.
We would therefore like to offer a potential solution in the form of a ‘savings and investment monetary protection and education levy’ (SIMPEL), collected centrally by government and paid into a pooled risk-based fund.
On the premise that most in the market accept the need to contribute to regulation and protection, the necessary funding could be achieved without any accusations of bias, unfairness, or punitive prioritisation that makes one sector feel it is carrying the burden for all the others.
The Investment Association’s Annual Survey said that, ‘Total assets managed in the UK by the IA’s members… [ended 2017] at… £7.7 trillion. This represents around 85% of the wider asset management industry which reached an estimated £9.1 trillion at the end of 2017.
Meanwhile, FSCS levies stand at just under £300 million for intermediaries and providers in the investment and pension sectors (the overall levy is £407 million, but this includes £124 million in levies for deposit takers, general insurance providers and general insurance intermediaries). If we then add in the cost of the Money Advice Service and TPAS (around £80 million) and the £82 million in premiums paid by advisers in professional indemnity insurance, we come to a figure of around £460 million.
Consumer financial protection and education are essential components for engaging and empowering the public in their financial wellbeing and the total cost could be covered by a relatively negligible deduction of just over half a basis point (0.00505%) from the total funds under management per annum in the UK. Industry would still pay a contribution providing excess funding to cover unpredictable costs and an accumulated surplus for greater sustainability and confidence.
This solution would smooth out the costs of financial compensation, whilst obviating the need for professional indemnity insurance which can otherwise be removed at annual renewal leaving firms and their clients exposed. It would provide additional funding for the Single Financial Guidance Body, provide additional funding for financial education and protect consumer rights to access safeguarded benefits under pension freedoms. It would also encourage investment and sustainable growth in the financial services sector, reducing the advice gap identified two years ago in the Financial Advice Market Review (FAMR).
It is recognised that legislative change would be required, and all stakeholders engaged to work with regulators and Government to flesh out the legal and financial structure of the new solution. The current system is unsustainable in our view and there is no doubt that the ‘SIMPLE’ solution is possible and desirable, given the urgent need to support consumer engagement and confidence in their financial affairs.
We would be happy to meet to discuss further and available to work with government to resolve this long-running problem, which is having an impact on the welfare of consumers across the UK and risks derailing pension freedoms.”
Our proposal to government is intended to offer what we believe is a viable solution and to stimulate debate. There might well be better alternatives and if members would like to input, please forward your suggestions email@example.com.
Pension Transfer Gold Standard Update
The profession can act to mitigate risk and improve consumer protection and outcomes.
In the immediate aftermath of the British Steel fiasco, an all sector Pension Transfer Taskforce was set up and Chaired by the PFS to consider how to address the emerging challenges for both the public and sector alike. Over 560 firms have already signed up to a new code based on 9 principals of ‘good practice’ which is linked to a consumer guide which will help to prepare and empower consumers before engaging professional advice. The overwhelming response and support of the Gold Standard represents the cultural and professionalism of the majority who are passionate about their profession but recognise that we need to be more united behind the best outcomes for the public, not just the clients who already trust us.
As a PFS led initiative, I cannot emphasize enough the value this sector-wide collaboration will deliver in terms of public trust, stability and protecting the reputation of the profession.
Find out more about Pension Transfer Gold Standard.
This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.