The Australian financial services industry needs to hammer home the advice gap message if the proposed FoFA reforms are to succeed, according to a leading UK insurance executive.
Maggie Craig, Acting Director General of the Association of British Insurers (ABI), said there were many similarities between the UK’s recent reform program and Australia’s FoFA proposals.
“There is an advice gap in the UK, and there’s clearly one here. If you end up with reforms that make that gap bigger then that’s really not a good outcome,” Ms Craig said.
Ms Craig spoke to riskinfo following a presentation to senior insurance staff at the second annual Financial Services Council (FSC) Life Insurance Conference in Sydney this week.
In the presentation, Ms Craig highlighted the key objectives of the UK’s Retail Distribution Review (RDR).
According to Ms Craig, the reforms aim to:
- Ensure remuneration arrangements allow competitive forces to work in favour of consumers
- Build standards of professionalism that inspire consumer confidence and build trust
- Encourage a market which allows more consumers to have their needs and wants addressed.
The RDR will drive up the cost of financial advice
However, Ms Craig said that the reforms will fail to deliver on the final objective and that the advice gap still exists in the UK market.
“The RDR will drive up the cost of financial advice,” Ms Craig said. “This means that we could end up with a very perverse outcome which sees fewer customers able to afford and access financial advice.
“This has become a very serious issue for us and is actually the biggest focus of our regulatory dialogue at the moment.”
Ms Craig shared the findings of research conducted by the ABI into the cost of advice. The study found that a full advice process costs around £670 (approximately $1000 AUD).
However, the research also found that two-thirds of Britons are not willing to pay for financial advice at all. The 25% who are willing to pay are only prepared to spend around £200 ($300 AUD), said Ms Craig.
“This leaves us with a huge gap between the cost of full financial advice and the amount customers are willing to pay. We don’t have anything in the middle.”
This is where Ms Craig says the ABI is now focusing its attention. It has provided a proposal for a limited advice model to the Treasury and is currently awaiting further clarification about regulatory requirements.
“We came up with a prototype, and we’re writing draft guidance. You just need to keep pushing at it.”
The prototype is for a limited advice model which consumers can access via the internet unaided, over the phone or face-to-face where a facilitator guides the consumer through the pre-determined questions.
“The prototype has lots of ways of kicking the customer out if the process is not appropriate for them. It makes sure the customer is not disadvantaged by the process and is helped towards the best outcome,” said Ms Craig.
“We proved that it comes up with a suitable recommendation for customers in 95% of cases. I know that’s not perfect, but life is not perfect. It’s an awful lot better than thousands and thousands of people having no support at all.”
the key is not just to highlight the problems, but provide workable solutions
When asked what advice she would offer the Australian industry, Ms Craig said the key is not just to highlight the problems, but provide workable solutions to the legislators.
“Every time there was an objection we came up with a solution. Be very clear and be able to prove what the consequences will be, and provide a solution, from the customer’s point of view. The regulator’s primary concern is the consumer, so make sure they’re at the heart of your solution.”
