RDR II is coming, and it doesn’t look pretty

So the government is going to tackle that thorny and perennial topic of financial advice, again.

HM Treasury, working with your friends and mine at the Financial Conduct Authority, have launched the Financial Advice Market Review.

FAMR clearly isn’t as catchy an acronym as the RDR, but it’s one which I’m confident we will all become intimately familiar with over the next twelve months.

If you’ve been busy catching up on your Paula Hawkins whilst lounging by the pool somewhere sunny, rather than reading the FAMR terms of reference, then RDR II effectively seeks to do three things.

It will examine the ‘advice gap’.

As most advisers are acutely aware, there is no such thing as an ‘advice gap’. Those that need, want and value advice can get it, in the main.

When the regulator and media talk about an ‘advice gap’, they really mean a ‘product sales gap’. This was widened (it always existed, probably) when the banks were forced out of the advice market by the need to be properly qualified and transparent about their remuneration practices. How horrid for them.

FAMR will also look at ways to ensure the regulatory and legislative environment allows and encourages firms to innovate and grow their business models to include affordable and accessible financial advice.

Put another way, FCA Project Innovate hasn’t worked as well as they wanted, so this is another stab at allowing firms to develop robo-advisers to plug that ‘product sales gap’ described above.

“How can we help our chums in the banking sector sell retail investment products to their customers again?” is, I imagine, a question about to be posed by a committee chairman somewhere in London or Edinburgh.

Finally, FAMR considers ways to encourage people to seek financial advice, addressing unnecessary barriers that currently deter them.

When I read that final objective, I got the sinking feeling the inevitable answer might involve a bigger remit and budget for the Money Advice Service. Perhaps they could splash some more cash on television advertising? Or another annoying commercial radio ad campaign?

That’s the cynic in me satisfied. Now for the opportunities.

FMAR presents an incredible opportunity for the advice community to do several things.

First, take a look at the response from the Institute of Financial Planning (IFP) to the announcement of this review. They got it spot on, in my opinion.

The IFP wants one outcome of this review to clearly differentiate between financial planning and transactional advice. Both are still being lumped in together, with the consequence that neither are being properly regulated.

This financial planner suggests that the Treasury and FCA continues something they started with the RDR. Rather than financial planning being effectively regulated (albeit is non-regulated in the technical sense) by the FCA, it should be the remit of the professional bodies to self-regulate planners. We already have the Statement of Professional Standing system in place. Why not simply extend it to create a cost effective, self-regulatory body which truly understands the distinction between planning/advice and product sales.

FMAR also presents an opportunity to overhaul the massively unfair, unjust and unruly Financial Services Compensation Scheme. A better delineation between advice and product sales could filter through into more appropriate funding of the FSCS; stop making the good guys pay for moronic product sales, make the polluter pay.

What the FMAR must do, in my opinion, is help consumers better understand this whole mess of a retail financial services sector. It really is a mess.

We understand it, in the main, because we live and breathe this stuff. Consumers do not. Even the better informed consumers still think of advisers like banks and insurance companies like Brazilian teak forest schemes.

Simplification is often an aim of government as a way to encourage saving. It’s time for some simplification here. Regulated advice, regulated products, everything else. You get FSCS protection on the regulated bits, paid by those firms that actually do those bits, you’re on your own if you end up in the rest.

That’s how to close the ‘advice gap’ and make advice more accessible to the masses; stop making simple regulatory structures unnecessarily complex.