Simplified Advice – a cause for FSA and FOS to have mutual objectives?
Having heard several comments about the concern of the FOS about the RDR ‘Guided Sales’ [Simplified Advice] approach being proposed by the FSA, I wanted to check out what appeared to be a contradictory message in the FOS ‘RDR Implications’ statement that they issued in December 2008. I felt that in most regards, the statement was helpful and supportive, though clearly intended to identify potential risks that an increase in complaints could result from ill considered or poorly implemented practices and processes. Ultimately, one must presume that all parties in the industry have a mutual objective of not wanting to see complaint volumes increase.
The area that concerned me was the section below, with the two clauses highlighted:
5. guidance for financial businesses – where the boundaries lie
5.1
Key issues include:
• how far uncertainty can be reduced by FSA guidance;
• how far reduced uncertainty means reduced scope for innovation; and
• what “focused advice” might mean in practice.
5.2
The November 2008 feedback statement indicates that the FSA is not currently minded to create a new rules regime. But the feedback statement includes some helpful material on what existing rules do (and do not) require. Potentially, there may be scope for further clarification by guidance – in one form or another. Options include:
• general guidance published by the FSA;
• individual guidance issued by the FSA to individual financial businesses; or
• published industry guidance that has been “confirmed” by the FSA.
5.3
Our strong preference is for general (published) FSA guidance. This is likely to be highly influential with ombudsmen when they are deciding individual cases, and so it holds out the prospect of reducing uncertainty for financial businesses and consumers in relation to potential claims.
5.4
It is likely to be impracticable for ombudsmen to take into account a host of (unpublished) individual FSA guidance to different financial businesses. Rather, it would be better for any general guidance to be updated regularly in the light of individual developments.
5.5
The FSA has stated publicly that it will not confirm industry guidance which purports to affect the rights of third parties (which includes consumers taking cases to the courts or to the ombudsman service). This means that FSA-confirmed industry guidance is unlikely to reduce uncertainty in relation to consumer claims.
5.6
It might perhaps be helpful if the FSA built on the material in the November 2008 feedback statement, and explored further explanation of what is (and is not) possible in the context of “focused advice” – with particular reference to the ways in which the financial business’s obligations can (and cannot) be limited. For example the FSA’s May 2007 insurance sector briefing [opens in PDF format] indicated where advice could (and could not) be limited in the context of with-profits. Something similar in the wider context of the RDR might well be helpful.
Source: FOS “retail distribution review”: ombudsman implications – December 2008
http://www.financial-ombudsman.org.uk/publications/policy-statements/retail-distribution-review-08.html
Having spoken with the FOS, they have clarified that where clause 5.5 is referring to ‘industry guidance’, the context is that this would be from bodies other than the FSA. This means that the FOS would be willing to refer to and give weight to FSA guidance – as stated in clause 5.3, but neither the FSA, nor the FOS would be likely to give weight to, or rely upon other ‘guidance’ that was provided by the industry. From this, I believe this would include output from organisations such as AIFA, ABI and BBA. However, it has to be said that these organisations my help to reinforce FSA guidance and it is expected that the ‘Moneymadeclear’ pathfinder will be helping to clarify what the public should understand and expect from different advice channels and how they are to be remunerated.
As you would expect from the FOS, they are primarily focused on the risks of ‘mis-selling’ or ‘misunderstanding’ rather than the benefits that a ‘Simplified Advice’ channel could provide.
However, the FSA has stated that one of the key objectives for RDR is of having:
‘a market which allows more consumers to have their needs and wants addressed’
Source: FSA
I agree with the FOS that it is important to manage the risk, but this also had to be balanced with the desire to increase access to advice. Some distributors may be reluctant to support such a route to market for fear of a potential mis-selling scandal along with associated costs (£2.7 and £11.8 billion in compensation for Endowment and Pensions mis-selling) along with damage to ‘brand’ and ‘industry reputation’. The FOS acknowledges this fear, but they would also say that they are an ‘independent’ organisation tasked to deal with complaints rather than advise on routes to market. Whilst they have expressed that they are willing to help the FSA, to share their experience and review proposals for processes to identify where there could be risk (and have already done so), it was for the FSA and industry businesses to mitigate these themselves.
Distributors should not be put off from investigating how a ‘Simplified Advice’ route to market could be made to work for the benefit of the consumer and to do so profitably. We have used the analogy of some consumers only be able to afford a cheap car to get them from A to B, whereas there will be others who can afford a luxury car or even have a chauffeur! We should not necessarily judge the cheap car as a poor product choice. In Financial Services, it is surely better for someone to have some form of provision to get them from the A to B of their personal needs rather than excluding them on the basis that they cannot afford the better and more expensive product and/or advice service. Encouraging consumers to engage with the industry, even via the ‘Simplified’ route, has long-term up-selling and cross-selling benefits for Providers, ‘Restricted Advisers and IFAs, as well as society as a whole.
We have an obligation to apply TCF to all that we do in the industry and if a Simplified Advice process is to be implemented by distributors (and providers), then it is incumbent upon them to regularly review, assess and manage the risk of implementing and running with inappropriate processes or advice standards. Technology is a great enabler throughout the advisory engagement value chain. It can ensure greater application and adherence to ‘Guidance Standards’, it can better identify and trigger warnings of risk and it can improve the user experience as well as better manage the customer relationship and communication. There has been some ongoing criticism of the RDR and whilst ‘creative conflict’ can be good, the industry should embrace the change to make it work, rather than let it be a missed opportunity.
Written by Mark Thelwell - Visit Website