The Financial Advice Market Review (FAMR) will provide a blueprint for the direction of financial services for many years to come, writes Marilyn Cole, with access and market-based solutions inevitably given a much higher priority.
As such, the review is a lot more than just a set of committees and talking shops - even if its extended timetable, along with a rejection of the long stop, has understandably exasperated advisers. This view has prompted Space to bring together a panel of industry experts to debate the topic Ignore the FAMR at your peril in the City of London next Wednesday evening, to which advisers are more than welcome.
In the run-up to this debate, we have been going through the FAMR document with a fine toothcomb and one issue stands out as a potential hazard to adviser business models - the definitions around advice and guidance. At first sight, one of the most refreshing ideas contained in the FAMR final report is the determination to design things around the public when it comes to these definitions.
It should certainly appeal in this era of customer-centric design for both products and services and it contrasts with many previous reforms, most notably the Retail Distribution Review (RDR). The RDR was rightly criticised for its top-down nature and the perception that regulators were often only seeking information to confirm their original intentions.
Yet while there is much to praise in the new approach, when it comes to the question of definitions of advice and guidance, we think advisers are correct to have some misgivings. This is not about testing a new recipe for Coca Cola - though of course they got that wrong - but something much more fundamental. It is about the much more difficult process of ascertaining what people need, want and believe they are receiving when they seek financial advice, guidance and/or information.
Recent history should set alarm bells ringing with advisers. They can, for example, point to the story of Money Guidance, first recommended by Otto Thoresen and designed to sit within the existing financial services ‘eco-system' a decade ago.
By the time of implementation, however, it had transformed into the Money Advice Service (MAS), and almost a rival to advisers, complete with IFAP-style advertising. Most advisers thought MAS had parked its tanks on their lawn and, to make matters worse, advisers had paid for the tanks!
It is difficult to know who or what drove the decision - ministers, the consumer lobby, which had always wanted a ‘national advice service', or the advertising and marketing ‘gurus' consulted by the MAS as it decided how to blow everybody's else's money. But it made advisers irate - just when their co-operation was needed. It also confused the public about exactly what advice meant.
It is fair to say that the definitions around guidance and advice could now prove to be a bear trap. If it was merely an exercise in properly delineating things and making them clear in customers' and clients' minds, that would be one thing. But there are other forces at work - for example, the Treasury believes the RDR neglected the all-important ‘access' issue and it wants this addressed urgently, partly as a result of pension freedoms.
Technology and the things it allows a business to do in terms of customer and client engagement could bring significant progress in resolving the access issue before the regulations catch up. If automated advice stalls or disappoints, however, there will huge pressure to 'do something' - and that is never a good environment for credible reform. It could put pressure on those definitions, particularly were guidance to be adjusted in terms of pointing people down a particular route.
Banks have to be part of the process too, but what will they be lobbying for? The best banks may no longer regard their customers solely as a resource to be exploited. Yet some in the banking sector still quietly believe it was outdated rules around suitability - not their own approach - that stopped them succeeding in the mass market.
Blank piece of paper
Of course, something radical, effective and safe may emerge from, variously, the innovation unit, the regulatory sandbox and the advice unit. But we still wonder how the definitions will fit. Starting with a blank piece of paper and simply asking what people believe advice and guidance to be in relation to financial services will no doubt produce some interesting results.
In our experience, many members of the public of all ages struggle to grasp the difference between, say, a pension and an annuity. Asking them about advice and guidance, and the answers may simply reflect that confusion.
It will be interesting is to interrogate what kind of service employees believe they have received, after attending a workshop about their workplace pension. A similar question applies to those who have self-selected and used execution-only services. At any rate, we certainly would not bet on them calling it ‘execution-only'.
The devil may not quite be in the detail of the responses, but he could be lurking in the researchers' questions. After all, somehow MAS ended up urging consumers to ‘talk to Ma'! So while we are massively in favour of researching the next steps with consumers, we are a little concerned that taking the very broad-brush responses and basing definitions around them could cause problems.
It does not have to be this way. A system designed properly around the customer and the client will almost always be better. But something that only brought about more confusion, an opportunity to pass guidance off as advice or even something that allowed an automated hard sell could be self-defeating and a recipe for confusion.
One final point - most modern advice businesses have been designed, adapted and adjusted to their clients' needs over many years. They are already designed to be client-centric as even senior regulators have acknowledged in the past.
It is important to ask the public what they want and to test what works, but basing any future reform on lose perceptions - or indeed on a Soho ad man's perception of what the ‘public wants' carries the risk that it could actually confuse things further.
Marilyn Cole is managing partner at customer engagement and design consultancy Space
Next week's ‘Ignore the FAMR at your peril' debate will put the questions she raises above - and many others - to a panel of experts that includes Alastair Conway, chief executive of James Hay, Steven Levin, CEO of investment platforms, Old Mutual Wealth, Mike Morrison, head of platform marketing at A.J.Bell, Roger Sanders, managing director of Lighthouse Workplace Solutions and David Tiller, head of adviser & wealth manager propositions at Standard Life,
To sign up for the debate, which takes place next Wednesday evening in the City of London, please register here
