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The verdict on a year of change in financial services

As 2012 draws to a close we ask experts on tax, pensions, platforms, and regulation for their highs and lows in a year of change.

Pensions

Ros Altmann, independent pensions expert

There were two huge developments in pensions during 2012. The first was the expansion of quantitative easing, with the Bank of England buying more gilts, pushing gilt yields down to record low levels and thus undermining most UK pension funds.

Both defined benefit and defined contribution pensions are priced relative to gilts. Falling gilt yields mean falling annuity rates, which mean pension savers get much lower pensions. Lower gilt yields also mean increased pension deficits, so employers have to put more money into their pension funds, or in some cases have been bankrupted by the spiralling costs.

The other major news was the start of auto-enrolment. State pension reform is vital to eliminate mass means-testing: if annuity rates stay at current lows, many of those being auto-enrolled are unwittingly lured into an unsuitable savings product and would be better off with an ISA rather than a pension. But once their money is locked in, it will be too late.

Platforms

David Ferguson, chief executive, Nucleus

Being the last year before the retail distribution review (RDR), the biggest regulatory change we may ever experience, 2012 was always going to be interesting.

For me, the big platform themes were:

• the limited functionality enhancements made by fund supermarkets as they move toward competing with the post-RDR-friendly wrap platforms;

• the emergence of more adviser-controlled platforms;

• the Financial Services Authority’s re-consultation on unit rebates;

• the spectacular losses being absorbed by some of the life company-owned wrap platforms.

Overall, platforms, particularly the provider-owned ones, will need to recognise that future margins are going to be much tighter than historic ones. The winners will be those who accept this and are still able to deliver great service and functionality while making a profit. That won’t come easily to everyone.

Tax

Richard Mannion, national tax partner, Smith & Williamson

The most significant tax event of 2012 was the series of press headlines regarding the use of contrived tax schemes, which suddenly meant that tax avoidance and tax morality became topics of conversation at dinner parties.

I recently heard a fascinating radio show where ordinary members of the public debated with a politician whether it was better to have global corporations paying very little corporation tax in the UK, but employing large numbers of people who in turn paid income tax and national insurance, or whether those companies should be made to pay the same level of corporation tax as their UK competitors even if that dissuaded them from trading here.

I anticipate the most significant development for 2013 will be the introduction of a general anti-abuse rule (Gaar). For many years, successive governments have attempted to plug gaps in the legislation, which meant they were constantly playing catch-up.

The government clearly hopes that the Gaar will mean the end of the market for contrived and artificial schemes, solely designed to obtain a tax saving. It is not intended to catch the centre ground of tax planning. Whether this is a realistic goal may only become apparent when the rules have been in operation for some time.

Regulation

Chris Hannant, policy director, Association of Professional Financial Advisers

The majority of our work this year revolved around compensation, both the proposed redress scheme for Arch Cru and the Financial Services Compensation Scheme (FSCS) funding.

The plans for a £110 million Arch Cru consumer redress scheme were unexpected and unprecedented. It was an unwelcome proposal and, from our point of view, a bad one.

What we saw last month in respect of the Financial Services Authority’s censure of Capita just confirmed our belief that something was very wrong at the heart of this, and it wasn’t to do with advisers: it was with the funds being run wrongly.

Preparing ourselves for the retail distribution review within the organisation has been a focus this year, which meant getting our name changed and looking at who would be our members. It has been an interesting year on a personal level too, I joined one organisation in one set of offices and now I’m in a differently named one in a different set of offices.

We’re also gathering information and planning surveys, so we can have a picture of the advice landscape now, and then we can judge what it will look like in 12 to 18 months: we will be able to tell a story of what has happened to the sector and we will also be canvassing opinions on how it’s working out, so we can prepare our thoughts for changes to the regime for when the Financial Conduct Authority starts its post-implementation review.

Platforms

Malcolm Murray, head of marketing, Transact

In 2012, we were vindicated in our belief that a professional adviser or planner will judge a platform on the totality of its service and not a cursory glance at the headline rate of charging.

The funds supermarkets had no option to unbundle this year, it was forced on them. But the question for 2013 will be have they made enough changes? They have had to make a lot in an awfully short period of time. It hasn’t been an easy year for them but most have announced what they are going to do.

With the funds supermarkets unbundling, I don’t think wraps have the advantage anymore. I think the fact the funds supermarkets have made that move puts them on a level playing field in terms of the service. But they may not have the functionality or the 12 years’ of practice we have. Any platforms resting on their laurels, thinking they’re home and dry because they’ve passed 1 January 2013 will be in trouble; the competition won’t get any less next year and recent changes in platform pricing shows that.

The FSA has put back the issue of cash rebates yet again with the delay of their policy statement on platforms until 2013. That’s caused some uncertainty which will continue into the next year but in the meantime, most of us have already got on and worked out what is likely to be the outcome. If it turns out cash rebates are allowed, that will be great but if they decide to stick with the ban, we’ve based everything on that premise anyway.

I think the platforms who make profit will continue to do so, the ones who aren’t and are striving will feel the pressure in 2013 as they will have less time to achieve the target as shareholders won’t put up with losses indefinitely.

Tax

George Bull, head of professional practices group, Baker Tilly

The next 12 months tax will be afflicted by politician’s good ideas from 2012. For example we have seen mansion tax proposals, relief of charitable trusts, VAT charges on pasties and so on. There is a fundamental political divide in the coalition. The right want less taxation and less public spending while the left want benefit spending maintained and higher taxes on the wealthy and that gap is unbridgeable.

Until 2007 the problem could be solved with growth but that is no longer possible, so the rich will have to pay more.

The big issues are these. There is this political slogan that the biggest burden must fall on the broadest shoulders. Chancellor George Osborne has said the tax burden on the rich is going to go up. Indeed we have seen stamp duty loopholes closed and a crackdown on tax avoidance schemes. Yet this government reduced the top rate for 50% to 40%. Will we see a 60% rate built on top of the 40% rate? Maybe for earnings above £250,000?

The other piece is corporate tax avoidance. There has been a race to the bottom over the last decade with countries trying to attract multinationals by offering lower tax regimes. Now the UK has created this Starbucks effect , as we have seen in the news recently. And it will take a lot of work to change that.

Regulation

David Thomson, director of policy and public affairs, Chartered Insurance Institute

With the ultimate deadline of the retail distribution review looming, the Chartered Insurance Institute (CII) has been impressed with the amounts of advisers that have committed to the profession in the past year.

In terms of professional standards I’m kind of amazed at the extent of which people have knuckled down and focused.

The issuance of statements of professional standing has been incredibly steady throughout the whole year… there was much less of a big spike toward the end of the year than I was expecting.

After the first few months of 2013 the firms that have prepared for new regulation, economic developments and opportunities like auto-enrolment will benefit the most.

The adviser community will continue to be incredibly resilient and will hopefully see an influx of fresh new talent.

One highlight of 2012 was getting more details about the regulatory tone of the upcoming regulator, the Financial Conduct Authority (FCA).

However, I am disappointed that the practicalities around the balance of power between the Bank of England, the Prudential Regulation Authority and the FCA have not yet been outlined.

Platforms

Martin Davis, chief executive, Cofunds

There’s no escaping the use of the words ‘change’ and ‘flux’ when describing 2012.

The rate of change has been matched by its constancy, so much so that it feels like it’s become the norm.

The message from the Financial Services Authority’s most recent platform consultation paper was clear: life is going to be easiest for those platforms, advisers and fund managers who embrace pricing in its simplest form.

This is an essential step towards enabling people to accurately assess the value of the service they’re receiving - resulting, one would hope, in a shift away from a preoccupation with knowing the price of a service without an appreciation of its value.

One highlight of 2012 was fund groups embracing the move to clean share classes. It’s demonstrated a real support for (or at least a real acceptance of) simple, transparent charging and that’s got to be good for end investors.

Looking ahead to next year when change gives way to the new norm of getting on with it, there will be a prolonged bedding-in period and we should expect disturbance pain in the first six months.

But advisers will adapt and ultimately thrive under RDR.