AS THE country wound down for Christmas two years ago the financial services industry was braced for the biggest shake-up in decades.
The Retail Distribution Review (RDR) may sound prosaic enough, but it was to change the face of retail investment forever.
It would spell the end of investment mis-selling, raise standards in the industry and make it all much more transparent for the end user – the humble investor. That was the idea, anyway.
There was also a likely downside, in that the RDR would leave fewer people able to access independent financial advice. What we didn’t know then was that another set of radical reforms would make this particular knock-on effect even more significant.
Last week, the City watchdog published a review of the RDR and proclaimed itself satisfied with the findings. While some impacts have yet to be realised, it said, the RDR has achieved most of its goals. Most notably, it added, the quality of financial advice is on the rise.
The problem, however, is that relatively few people can now benefit from that improvement. That’s because the RDR, which included a controversial ban on commission payments on investment sales, was always going to have the effect of widening the so-called advice gap.
Some advisers chose to leave the industry altogether, while the shift to quality means that only a handful of advisers will now serve those with less than around £50,000 to invest. Meanwhile, high street banks have either ceased to offer investment advice or will only serve their most affluent clients, freezing out the “mass market”.
The Financial Conduct Authority (FCA) seems fairly relaxed about this, insisting there was little evidence of a “significant” reduction in the availability of advice.
The key term here is “availability”. Access to advice is another matter and one that the regulator cannot afford to gloss over.
One reason for that is pension changes taking effect in April that will allow savers aged 55 and over to take their entire defined contribution pension pot as a cash lump sum, including 25 per cent tax-free. The remainder will be taxed at their marginal rate, rather than the current 55 per cent charge.
Hargreaves Lansdown has estimated that up to 200,000 people will take advantage of the new rules to take their entire pension pot as cash next year. Many will need advice if they’re going to find a way to get income from their pension savings while making sure they don’t run out of money before they die.
However, the average pension fund is worth around £17,700, and even when private savings are added to it the chances of the typical retiree being able to afford independent advice are slim.
A survey by PwC in the wake of the 2014 Budget found that 63 per cent of consumers plan to seek financial advice from an IFA when they come to access their pension pot, yet half of those respondents had pension savings below £40,000.
So where will they get proper advice (as opposed to the anaemic service provided under the government’s “guidance guarantee”)?
They probably won’t, is the simple answer, which is great news for the rip-off merchants salivating over the pension cash they’ll be able to get their hands on after April.
That’s not to say people can’t be trusted to look after their own cash. But to know how to manage it in a way that guarantees it’ll last for as long as they live? Very few can do that without expert help.
The FCA has acknowledged that it needs to encourage innovation in delivering new forms of affordable advice, but its latest report suggests it’s not in any rush. It’s a stance reminiscent of its predecessor, the Financial Services Authority, which had a fatal inability to anticipate changes in conditions.
The FCA has been a marked improvement on the previous regulator, but there are worrying signs that it’s slipping into the same bad habits. As ever, of course, the consequences will be borne by the consumers that the regulator is supposed to protect.