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Topics: Prudential| FOS| Phil Billingham| BBA| FSA
Simplified advice poses a “systemic risk” to IFAs because it opens them up to mass compensation claims for unsuitable advice, according to Prudential.
John Warburton, product director, said it is this threat which is preventing insurers from developing a simple advice proposition.
Simplified advice has been generally viewed as a lighter service which will deliver an appropriate – rather than the best – outcome for clients.
But Warburton said insurers are concerned the Financial Ombudsman Service (FOS) will apply the strict rules on suitability developed for individually-tailored advice to simplified processes, leaving advisers vulnerable to complaints and insurers open to accusations they had caused them.
“Making simplified advice work is all about the FOS. Simplified advice has stalled because it creates an appropriate solution but potentially not the most suitable solution, and the challenge is how FOS deals with that.”
FOS guidance states it would not expect a "full fact-finding" exercise for simplified advice - but would look at the questions asked and the options open to the particular consumer concerned.
Where the simplified advice involves an automated process, FOS said it would look at whether there was a good record of the information the consumer gave and the choices they made.
However it makes this part of its consideration of any complaint.
The key to unlocking the stalemate is for politicians, the FOS and the FSA to accept that they will need to approach complaints about simplified advice differently, Warburton said.
“It’s down to political will. If we genuinely believe we want to change the current savings and protection gap on the national level, we have to accept some fairly big consequences. Is there the political will to accept this is the price we will pay?”
Phil Billingham, head of business consultancy at threesixty services, said having a two-tier consumer protection system would be too hard for the regulator to sell to the public.
“If the regulator said it has a lower regulatory standard for some advice, it runs the risk of saying some consumers will be given less protection than others. That would be very difficult in the current environment.”
However, without a softening of policy, Warburton said for advisers who use simplified advice to service large numbers of less profitable clients, the problem escalates into a systemic risk of mass claims.
“It is a systemic process. This creates a systemic risk. If there is deemed to be a problem with the process, advisers could be liable for mass claims.”
“Advisers will need to be incredibly careful about which tool to choose, and whether just one is suitable for their target market. They would need confidence they were not setting themselves up for mass claims in future.”
Prudential will not launch into the simplified advice market, Warburton said, but rival Aviva has announced it is developing an offering.
The Aviva service would be for IFAs to use with their mid-market ‘bronze’ clients, though director of distribution Dean Lamble said the insurer wants more guidance from the FSA before it will go to market with a process.
FSA chief executive Hector Sants has said the regulator will publish guidance on simplified advice later this year.
In a speech to the British Bankers’ Association (BBA) conference in March, he said for a “fully effective” market to exist for investors, it is “vitally important that a credible simplified advice service exists alongside the full advice offering”.
However the FSA said it plans to treat simplified advice on a par with full advice.
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simple advice
It is the consumer that will suffer from 'simple advice' and 'simple products' because , in this day and age, they exist only in the minds of accademics and fools..
Posted by: Terence P.O'Halloran
What do you leave out?
If "Simplified Advice" is to work, the FSA & FOS need to agree what can be left out. Having read the syllabus for R06, it makes it clear that it is the responsibility of the adviser to gather all the relevant facts, to consider all the tax consequences, risk tolerance etc etc in order to come up with a solution for a client. Doing it more simply means leaving some of that process out, which will then lead to adverse outcomes for some people. With all the headlines about fines and risk profiling being criticised by the FSA, is it any wonder no one has come up with a solution for this mythical "advice" process?
Posted by: David Prior
Good Advice
I'd be surprised if John Warburton is wrong on any of the points he makes in this article. He is challenging Sants to admit in writing that for the RDR to work more clarity is required and that there needs to be two unambiguous channels with different levels and standards of compliant advice and compensation. The last paragraph "However the FSA said it plans to treat simplified advice on a par with full advice." rather suggests that the FSA will as ususal try to have it both ways and to blame everyone else for the predictable mess it has caused. The insurance companies will write no business if they don't offer simplified products, but have no business left if they do only to get crucified by the ambulance chasers. Is Sants so stupid and politically inept as to spitefully destroy thousands more jobs in the private sector at a time when we can least afford it? Come on Hector, you filled the chalice with poison. How does it taste?
Posted by: Michael Both
disaster awaits
If this ever gets of the ground it will crash and burn.
Posted by: d
Payment Protection
Payment protection insurance was about as simple as it can get. Your sick it pays out your redundant it pays out. Oh sorry I forgot you have to have a job, you shouldn't have cover elsewhere etc etc etc. God just look at the monies the banks have set aside for this liability and you see how simple it all is!
Posted by: Bob Donaldson
A good comment
as always from Bob.... How true .... PPI was very simple. The banks loved it because it was an easy sale, but oftenj forgot to check the basics as they deemend it "no advice"
Posted by: Phil Castle
Mountain in the making
I can't help but notice that this article deems that Finacial advisors are robots, pre-programmed monkeys void of commonsense. Clients pay for advice, why not do something crazy and advise. Yes there are regulations that govern how you give advice but there is no legislation that says you cannot make your clients fully aware of the circumstances of their option, that's all down to FA's themselves.
Posted by: Karl Harris
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Take Heed
Apart from the fact that the ever deceitful Pru wants to put IFAs off this sector as they are in the process of launching their own direct sales, it does make sense and should act as a warning to those who seek to trawl in shallow waters. Simplified advice is geared to simple people. Simple people have difficulty understanding even the simplest concepts. To make any money out of this you need to pile it high and sell it fast. All this inevitably leads to complaints and the Claim Handling sharks are only too happy to swim in these waters. You have been warned – don’t bleat if you get zapped.
Posted by: Harry Katz