WMU JANUARY 2013
A new year, new rules
1st January 2013 marks the start of a new regime in financial services in the UK. The change in
regulations also sets in place changes for the next three years.
For several years it has been known that there are many shortfalls in the regulatory regime under
which financial salespeople operate in the UK. Following an extensive review it was deemed that
there are three areas that may affect the levels of advice that consumers receive from financial
advisers. These are:
1. Commission bias
2. Lack of knowledge/ability
3. Insufficient reserves to deal with problems
When you look back at the various problems that have been associated with financial advice you can
see that these three issues have either caused the problems in the first place, or have exacerbated
the situation. Pensions mis-selling, endowment mis-selling, precipice bond mis-selling, are just a few
examples where high levels of commission may have caused the wrong product to be sold to the
wrong person at the wrong time. Lack of knowledge and ability may also have contributed to poor
advice, and of course, when complaints are made, companies often close down or collapse because
they don’t hold sufficient reserves to meet the costs of fixing their errors.
And so the Retail Distribution Review was put in place. RDR, as it has become known, is an attempt
to put things right. In our opinion it doesn’t go far enough, and there are plenty of holes in the
regulations that some companies have already discovered and will no doubt use going forward.
Nevertheless, the new regulations are a good start.
So how will they affect you, and is there anything you should do?
Commissions
From this month, commission payable on investment-related products will become banned. This
means that if an investment is made or a pension contribution made which is not part of an existing
agreement, commission is banned, which means that fees must be paid instead of commissions.
This will be difficult for many advisers simply because the level of fees that people are willing to pay
is generally significantly less than the commissions that previously were paid. For example, most
advisers selling a Prudential Bond could have earned 7% commission. This means that for a £100,000
investment, £7,000 would have been paid in commission. It is unlikely, however, that many people
would pay a £7,000 fee for setting up a Prudential Bond. And so, in our view, many advisers are likely
to see a significant fall in their income.
For you as the client, the main impact is on old investments. For an investment established before 1st
January 2013, the adviser can still receive commission on that contract, even though commissions
are banned. Therefore, if you have a pension, for example, and you pay into it monthly or annually,
the adviser that sold it to you would still be receiving commission. As pensions no longer can include
commission, it makes sense to change the pension to a new “commission-free” arrangement, and
save yourself thousands in the process.
If you have any old investment, saving plan or pension, please let us know as soon as possible and
we will advise you on the best action to take.
Knowledge
From this month, financial advisers must be qualified to what is known as Level-4 Qualification to
continue to practise. In its most simple terms, this is about twice the level that was formerly
required. At the time of writing only 66% of advisers had this qualification (source: Aviva education
review September 2012), which may mean that many will be leaving their business or simply selling
out.
If you have any products put in place by advisers who are no longer practising, then we recommend
these be reviewed immediately. If the adviser is no longer practising because they have insufficient
qualifications, is what they arranged for you the right thing?
Reserves
The problems following the Arch Cru fund collapse demonstrate how important it is to use an
adviser with sufficient reserves if things go wrong. The collapse of Arch Cru caused a large number of
financial advisers to go out of business, and as a consequence their clients are now reliant on the
Financial Services Compensation Scheme for reimbursement. Fortunately the scheme is excellent
and well funded (from the levies that advisers pay into it), which means that most people will get
most of their money back, but that process may take several years.
The new rules mean that IFAs need to significantly increase their reserves over the next two years to
ensure that they are sufficiently robust to withstand bad times.
Loopholes
Unfortunately, there are a number of what we consider to be loopholes in the new regulations. For
example, payments known as bundled payments will be permitted until the “platform review” is
completed, which will take at least another 12-18 months. Bundled payments are what you may
have called “kick-backs” in the old days, and are payments made to advisers from the fees that an
investment company charges. As these strictly speaking are not commissions, they will still be
allowed. Also, if someone is contracted to a single company, that company can make a payment to
the salesperson without you knowing what that payment is!
Inflation as predicted
Inflation remained at 2.7% for October as measured by CPI, while RPI fell from 3.2% to 3% for the
same period.
Interestingly, fuel prices had the largest downward effect on inflation over the period, while food
increases had the biggest impact.
The incoming governor of the Bank of England, Mark Carney, said that it would be better to focus on
nominal GDP, which is a mixture of GDP and inflation, rather than focusing simply on inflation.
Changes in pension rules (again)
Do you ever feel that it would be nice if things just stopped changing? Certainly for pensions this
would be a good idea.
The problem is that a pension is a long-term arrangement, and people spend a great deal of time
and effort planning what needs to be done so that they have sufficient money in retirement. If the
rules keep changing, those plans get messed up. The real issue is that the rules change because of
temporary short-term issues that politicians think are important. The politicians know they won’t be
around in power in 10-15 years’ time, so whatever impact there is will not be their problem.
The reduction in contribution allowances from £50,000 to £40,000 may not sound to be a big deal,
but in the world of the media a £50,000 pensions contribution is a big contribution and so is easily
attacked. However, such contributions are often made in the last year or so of work by ordinary
people who need to boost their pension income. If you were planning to do this, and then the rules
suddenly changed, it really doesn’t help those who are trying to take responsibility for their own
lives.
The change to the lifetime allowance cap to £1.25m is crazy, when it should be increasing with
inflation. In a world where we need people to save for their future, it makes no sense to reduce the
amounts that they can save!
If you have a pension fund of over £1m, are in a final salary pension scheme, or have been in one
where the amount of annual income totals £40,000 or more, we should review it immediately to
establish if “fixed protection” or “personal protection” should be put in place.
More pension changes (again)
Do you ever get the impression that politicians and the Treasury have no idea what they are doing?
You may recall that the present government changed the rules of pension fund withdrawal and
created “drawdown” pensions, which were nearly the same thing as what was in place before
pension fund withdrawal! In making these changes they also reduced the amount that can be
withdrawn from the pension from 120% of the GAD allowance (this is an arbitrary amount set by the
Government Actuary’s Department, and is designed to make the pension last for a lifetime) to 100%.
At the time we said this was nuts, and would cause nothing but problems.
In the Autumn Statement the chancellor advised that it was now increasing the allowance to 120%,
i.e. back to what it was.
The move is a good thing and was well received, but I get the feeling that it would help so much if
the people running things perhaps asked real advisers working every day with real people with real
money, what the implications of a change would be, before they did it.
IHT forms change
If you are in the middle of dealing with probate, or will be dealing with probate in the next few
months, be aware that the IHT400, IHT 401 and IHT 404 forms have changed to take into account
the recent changes in IHT announced in the Autumn Statement.
Misery Index improving
The Misery Index is a measure of unemployment levels and inflation, and the index is dubbed a
misery because since September 2009 both have been on the increase. This is not a good sign for
businesses which are having to lay off staff, or a morale booster for us, the consumer. At the time
the level of unemployment was 2.59 million people and the Consumer Price Index (the figure now
used by the government to measure inflation) was at 2.6%. Previously, the rate used to calculate
inflation was the Retail Prices Index. The main difference between the two is that RPI includes the
cost of mortgage interest and council tax, whereas CPI does not.
For the Misery Index to improve, we want the unemployment rate to fall, and/or inflation to fall. I
am pleased to report that at the end of November, we had an improvement. November figures show
a fall in unemployment to 2.51 million, which is a reduction since July of 3.3%. In addition, the
number of people claiming Jobseeker’s Allowance has fallen to 1.58 million.
So what does this mean? Unemployment figures are improving, and given October’s news that the
UK economy grew by 1%, it seems that businesses are recovering and looking now to take on the
staff that were let go over the previous four years. This can only be good news. Consumers are still
spending as interest rates are so low, and businesses are responding to this demand. Looking
forward through 2013, we obviously hope that the economic growth continues, although this will
increase the chance of interest rates going up, which will affect investments in gilts, property and
bonds. For those of you who have your investments actively managed by Efficient Portfolio, this is
the area where you may see the most changes in the coming year. But of course we don’t have that
crystal ball; only time will tell!
Sugar-coated bad news
If you had a little time on your hands on the 5th December you may have chosen to sit down with a
cuppa and a biscuit and listen to the dulcet tones of Chancellor George Osborne as he delivered his
Autumn Statement.
On the face of it, looking at some of the key points, there were certainly some seemingly positive
statements. The three pence increase in fuel tax due in January has been cancelled; the personal
allowance has risen by £235 to £9,440; basic state pension benefit will increase by 2.5% this year;
and the ISA allowance will also increase by 2.1% to £11,250.
So what about the flip side: who will miss out to make way for these increases? Well, the increase in
the personal allowance is heading in the right direction for the coalition’s aim of a £10,000
allowance and the chancellor’s target of bringing the allowance in line with the age-related
allowance which has been frozen as a consequence. High rate tax payers will see the HRT threshold
rise by just 1% to £41,865 in 2014 and then to £42,285 in 2015. This leads us on to a common thread
throughout the Autumn Statement of “1%”. Other 1% increases include the Nil Rate Band allowance,
which will increase from £325,000 to £329,000 in 2015/16, and whilst the new Capital Gains Tax
allowance is yet to be confirmed for 2013/14, we have been told that it will increase in future years
by … yep, you’ve guessed it, 1%. Certainly as regards the HRT threshold, this seems to be linked to
the previous imposed limit of 1% on benefit increases.
So what does this mean? By his own admission the chancellor acknowledged that this 1% is likely to
be lower than inflation, so in real terms these increased allowances effectively mean that we’ll end
up paying more tax! So, a good or a bad Autumn Statement? Well, I guess that depends on your
personal circumstances, but it does highlight the importance of digging a little deeper behind the
rather more attractive headlines.
A positive light for Greece?
In the middle of December, S&P upgraded Greece’s credit rating by six notches from selective
default to B-. S&P has praised fellow Eurozone countries for their “strong determination” in their
efforts to keep Greece as a member state of the Eurozone. They have also praised the Greek
government for their efforts in continuing to make spending cuts. Does this mean that Greece and
the Eurozone are emerging from the trouble?
What it tells us is that S&P is confident that a Greek default and leaving the Eurozone is very unlikely.
It also tells us that they have more confidence in Greece to maintain its end of the bailout deal and
that they will continue to do so.
The underlying feeling, though, is that confidence in both the Eurozone and Greece is increasing.
However, that is not to say that Greece is out of economic trouble. Official figures released for the
third quarter of 2012 show an increase in unemployment to 24.8%, up from 23.6% in the previous
three months. The figure for young people is 56.6%. Over half of all young people are out of work,
and it doesn’t take a genius to work out that that is not sustainable long term, so there are many
things the Greeks need to improve economically.
However, the main result as discussed above is that Greece is extremely unlikely now to be leaving
the Eurozone, thereby giving the global economy more confidence in the Eurozone as a whole.
Book of the month
This month’s book is The Invasion Game, by Stephen Newton. Stephen has worked as a business
coach and consultant since 2001, and is an expert in business development and marketing. His work
also often entails leadership and operational management development for the client firm’s senior
team in order that they are able to implement their firm’s strategy or adjust it so that it can be
implemented.
This book adopts many of the business growth principals that Charlie has learnt over the years and
many more new ones, but with specific focus on lawyers and their practices. If you are a lawyer, you
should certainly read it, as it will help you transform your business.
As an alternative to the book, he is also speaking at an event at The Rural Business Community in
Seaton for us on Thursday 24th January at 8am. If you are an accountant, solicitor, or other business
adviser and you would like to attend, please do get in contact. If we have any space available, we
would be more than happy for you to join us. If you do, please email charlotte@theruralbiz.com to
book a place. Breakfast is also included.