Since we last spoke
In this blog, Personal Finance Society CEO, Keith Richards, brings you up-to-date with all the PFS news, projects and initiatives that he has been involved with since his last round-up.
PII approaching a tipping point?
Top of the list the recurring and related issues of professional indemnity insurance (PII), where financial advisers are finding it increasingly difficult to secure the cover they require to be able to offer pension transfer advice, worse still the mandatory cover to remain trading.
Anecdotal evidence has reached us that PI insurers are reacting adversely in the wake of the British Steel Pension Scheme fiasco, with some advisers being challenged at the point of renewal and cover being denied. One firm told us that their premium had increased tenfold… with an accompanying £100,000 excess for DB transfers.
Such untenable scenarios are putting the whole principle of the pension reforms at risk, despite the FCA’s recent assertion that PII is fine as it is.
The government’s decision to include DB pensions within the 2015 pension freedoms was sensible to protect consumers, but equally introduced serious challenges. For whilst they have mitigated the risk of poor decisions for those with gold-plated pensions by mandating the need for professional advice for any pot over £30,000, this contradicts the principle of consumers being free to do what they want, without restriction.
As a result, many advisers have been forced to deal with what is referred to as an ‘insistent client’, ie: one who has already decided to access their pension fund - often encouraged by enhancements from the scheme itself - and frustrated that they still have to pay for advice they don’t want.
Should insurers continue to harden their position, or worse remove cover for PI in future, it will significantly expose firms and their clients.
A SIMPEL solution to FSCS funding
The above PII problems will not only force some advice firms to self-insure, but any subsequent financial failure will place added pressure on the Financial Services Compensation Scheme, where I believe the time has come for a more broadly-based solution, combining fair and cost-effective levies with a public financial education programme.
We have proposed that a potential solution could be developed in the form of a savings & investment monetary protection and education levy (SIMPEL), collected centrally by government. On the premise that most in the market accept the need to contribute to regulation and protection, FSCS funding could then 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.
Funds under management in the UK retail sector - pensions, ISAs, investment trusts, life investment products etc - are worth somewhere in the region of a trillion pounds. Meanwhile, FSCS levies, the cost of MAS and TPAS expenditure stands at £700m per annum.
So is a practical, affordable, workable solution staring us right in the face? Could the total cost of FSCS and regulatory fees be covered by a relatively negligible seven basis points deduction from the total funds under management per annum?
The current need for professional indemnity insurance would then be disposed of if adviser contributions went into the same fund to pool the risk. Excesses could still apply, but over time the build-up of such a fund would almost certainly reduce contributions and help mitigate financial failure.
That would solve the problem and obviate the current over-reliance on PII. It’s a solution that has in-built long-term sustainability and which would provide greater certainty for consumers, advisers and product providers.
Social investing – for impact and return
The Personal Finance Society, supported by the government's independent advisory group on social impact investing and the Department for Digital, Media, Culture and Sport (DCMS), have launched a new good practice guide to explain how you can assimilate value-based investing into your client recommendations where appropriate.
The guide incorporates a link to a bespoke ‘conversational tool’ on three levels, tailored to suit different adviser capabilities. Each features a series of easy-to-follow exercises that will enable clients to clearly articulate their preferences on investments that create impact.
For some time now there has been evidence of a growing interest in schemes that incorporate a ‘value-related’ component, with more than half of individual investors expressing an interest in social impact investments.
We are aiming to provide guidance on, and give an overview of, this growing market - including recent government and regulatory activity - to help those investors with an interest in social impact investing to align their savings, pensions and investments with their personal values.
The FCA have confirmed that no specific regulatory barriers exist to prevent retail investors or financial advisers increasing their involvement in social impact investing and there has been steady growth in the market for social impact investments that deliver a social impact as well as a risk-aligned rate of return.
Financial education for tomorrow’s generation
Continuing on an innovative theme, we have just launched a nationwide pro-bono financial education programme, with the objective of establishing an active link with every secondary school and college of further education in the country.
Within the first two days of it being announced, more than 250 members registered an interest in becoming a volunteer trainer - demonstrating a significant appetite across the sector to play a key role in serving the wider community.
Our new ‘Education Champions’ initiative will provide important and complementary financial education for tomorrow’s generation and we hope it will ultimately become a key part of the national curriculum.
Based on the society’s existing ‘Discover Fortunes’ schools initiative, which uses gamification to demonstrate key financial scenarios, it will additionally help to raise the profile of a career as a personal finance professional to rank alongside other professionals such as accountants and solicitors.
To facilitate this we are calling on our 38,000 members to become PFS education champions, thereby providing additional momentum to support other initiatives run by government and the Money Advice Service (MAS).
As well as the pro-bono programme itself improving financial education for the next generation, our education champions will be a key contact point for schools to provide guidance on financial matters and support teachers more broadly.
Volunteer recruitment began on 1 May and training will take place throughout the summer. The scheme itself will then be launched in September, to coincide with the start of the new academic year.
Full details and how to register can be found here: http://www.thepfs.org/membership/future-professionals/education-champions/
Sector professionalism overrules caveat emptor!
Frequent calls for the return of ‘caveat emptor’ (buyer beware), to ensure that clients take a degree of responsibility for their financial decisions, rather than all the liability resting with the adviser, have received my support over the years.
However, I am more than happy to put my hand up and admit to a change of heart - thanks to the exceptional degree of professionalism that we have achieved in today’s financial advice sector.
Accordingly, it is difficult to argue for its return.
We now have more than 24,000 qualified advisers, 6,000 of whom are at chartered financial planner status and a further 8,000 with advance qualifications. Each possesses a depth of knowledge and expertise far beyond that of most clients and it is therefore unreasonable to expect consumers to take any responsibility - apart from that of being empowered to make decisions.
Caveat emptor only really applies when people are buying a product. In a professionalised society like ours, the product is you. It's the professional advice you provide… so buyer can trust, not be aware!
The gap in knowledge between client and adviser is now too wide and the best way to handle the relationship is to treat everyone like a vulnerable client.
New taskforce aims to unite pensions sector
The Personal Finance Society have taken the role of lead sponsor in the formation of a new Pensions Advice Taskforce, created to provide strategic industry leadership and raise pension advice standards.
Its main focus will be to create a common set of professional standards, encourage the sharing of good practice and provide a code of conduct that gives clear guidance in areas of ambiguity for everyone involved in retirement planning.
The sector is predominantly made up of small firms, who currently find it difficult to benchmark themselves against the wider market. On their behalf we shall be liaising with the government and the regulator to facilitate alignment and unity on key issues and ensure the best possible consumer outcomes at all times.
Among those joining the 11-strong inaugural meeting were former pensions minister Sir Steve Webb (Royal London), Margaret Snowden OBE (Pensions Administration Standards Association), Simon Chrystal (Workplace Solutions) plus PFS board member (and former FCA technical specialist) Rory Percival.
One of the priorities of this new taskforce will be to establish a series of positive, cultural objectives, in order to protect the overwhelming majority from the poor outcomes sometimes created by a small minority.
The FCA have already expressed an interest in the establishment of the voluntary code and I shall be meeting with chief executive, Andrew Bailey, in the next few weeks to discuss the initiative further.
So there you have it: a snapshot of what we have been working hard on, on our members’ behalf and the public interest, in recent months.
As ever, I would be delighted to hear from members on any issues, ideas and improvements that they wish to discuss and invite them to contact me via e-mail at: firstname.lastname@example.org
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.