Guiding light

Otto Thoresen’s much anticipated final report into generic advice has achieved that rare feat in financial services reviews – a near universal welcome from across a wide spectrum of stakeholders.

Advocating an improvement in financial education is something few people will criticise. But it is in the more delicate areas of persuading the industry it is in their interests to contribute towards the cost of his proposed Money Guidance scheme, as well as designing an organisation that will inform without giving full advice that has been the bigger challenge.

What criticism there has been is that the service does not go far enough, but Thoresen is unfazed by this. “I am a glass half full guy. I have a very strong feeling that there is a gap in financial capability and that this service can fill this gap,” he says.

Thoresen is a single-minded businessman who has risen to the top of one of the UK’s biggest players in a career spanning 30 years. He puts this in part down to the influence of his father, a Norwegian sea captain, whose self-sufficiency has taught Thoresen to always remain in control of his own destiny.

“My father was captain of his ship. He had to be able to cope with the unexpected. He was in situations where you are totally reliant on your own ability to get through. I think I got a lot of strength and single-mindedness from the example he set.”

He seems to have plotted his own course in the review he has just carried out for the Treasury. The headline issue coming out of Thoresen’s final report is the rejection of generic advice, which some had confused with general financial advisers and the Retail Distribution Review, in favour of Money Guidance.

That confusion with the new tiers of adviser being proposed by the RDR and other developments such as personal accounts had created some suspicion around what Thoresen had been charged with creating. So was he perceived as turning on his natural allies when he took up the brief?

“There was no resistance from the industry once I explained what I meant. The language of generic financial advice was not helpful,” says Thoresen. “There was confusion about what the review’s intention was and the issue was further confused by the coincidence that the FSA was doing the RDR at the same time. But once we had that confusion sorted out, most people were at worst neutral.”

Choosing the head of an IFA-only retail financial services provider to run a review aimed at setting up a financial advice and assistance body for the millions who do not get access to professional financial advice was an astute move by the Treasury. Aegon is one of the favourite providers amongst financial intermediaries – if its chief executive says a centralised advisory service will boost rather than cannibalise intermediaries’ business, then his voice will be listened to.

One of the early concerns of intermediaries when the idea of a nationalised advisory body was first mooted was that it would eat into their margins. Thoresen is adamant that this will not happen, and his report points to a considerable benefit both to the financial services industry and the government of having a financially literate population understanding and buying products that better meet their needs, give them greater consumer satisfaction and help them to provide for themselves.

At the core of Thoresen’s proposals is a Money Guidance body, a new advisory organisation that will dispense information to consumers or refer them to existing bodies such as the Pensions Advisory Service or Citizen’s Advice Bureau.

But it will also deliver information, which Thoresen is at pains to stress will fall short of full advice, to consumers to attempt to persuade them them to make better provision for their future. But will this not create liabilities for the new body when people act on the advice or information it dispenses and end up doing something that is not in their best interests? Thoresen says policing this boundary is one of the new body’s biggest challenges.

“Much of what we are planning to do is where the adviser is in safe territory. As you get closer to the regulatory boundary you have to be very careful,” he says. “But what we found in the prototype is that advisers were cautious and did not tend to go towards that boundary. When we accredit these advisers we will have to focus hard on this area, but I think it is manageable.”

What about people in crisis situations? “This is not a crisis line. It is a preventative service,” says Thoresen. “And when people are in a crisis situation? We will pass them through to the appropriate crisis management organisation, such as the National Debt Line. We will tell them where to go and help them understand what their priorities are.”

But surely the more Money Guidance holds back from giving anything approaching advice, the less effect it will have. Thoresen’s early research, carried out as part of the review, found that four out of 10 people took at least one action within a week of using the service, whether buying a product or talking to an adviser.

The one area of guidance that will come under intense scrutiny is the issue which will not go away – personal accounts and means testing. On this issue Thoresen deftly passes the question on like the hot potato it is, leaving the detail to those who will succeed him. This attitude is unsurprising seeing as personal accounts are nowhere near being finalised, and even more so given his role as head of a major private pension provider.

“It’s not clear how personal accounts will be structured so I am not able to give a view on how to treat them properly. We feel we need a principle of fairness across the pension sector. While not giving advice on pension issues, personal accounts will generate generally a demand for information. We want to reflect that fairly,” he says.

“The Money Guidance adviser is looking across a broad range of retirement issues, but he will not be saying whether you should or should not be auto-enrolled. The Department for Work and Pensions will also develop a communication package to give people the right information. A Money Guidance adviser might help them understand some of the technical issues of what that information is.

“When I got into this I saw that this was a challenging issue for us. We have to help people understand the choices before them but it is up to each individual to make the decision themselves. In the trials some users felt disappointed that they couldn’t be told exactly what to do , but you have to draw a line,” says Thoresen.

He cites the open market option as one specific area where people can be given better information through Money Guidance. “The fact you have choices through the open market option will be made clear. This is a good place where we can signpost people,” says Thoresen. “One off the responsibilities of the service is to promote good habits. The body that takes matters forward will be looking at how to get those messages to people at the right time.”

Asking the financial services industry to stump up another £25m a year on top of their existing levies to pay for Money Guidance is reasonable argues Thoresen. His review points out the industry currently spends around £1.5 billion a year on advertising and promotion, and cites ABI figures that suggest commissions paid to intermediaries for life, pension and investments alone were around £4.2 billion in 2005.

Thoresen argues that consumers’ greater propensity to buy financial products as a result of their increased confidence and understanding of their needs could reduce overall acquisition costs rather than simply change the nature of the marketing needed.

He predicts huge wins for the financial services industry – between £3.6bn and £5.5bn between now and 2060 for a paltry £400m to £800m spent on Money Guidance, although much of this saving is clearly expected to be made by providers.

So how much of this benefit will extend to the financial advice sector and more specifically to the workplace financial services community?

“There will not just be an increased demand for products but also an increased appreciation of the different advice channels that are available. The independent advice sector will be seen as valued more as a consequence and there is a potential for an increase in demand for the commercial advisory sector,” says Thoresen.

And what about the use of the Money Guidance concept through the workplace? “I see no reason why the corporate intermediary could not offer Money Guidance. There is a tendency to focus on what is not being done, and the savings gap is seen mainly in the territory of individuals. But in the workplace, through corporate intermediaries, employers are already investing in staff a lot,” says Thoresen.

“In the prototype we ran, advisers would go out to store managers, in Woolworth’s and B&Q and make presentations to staff. The response has been almost universally positive to that. Perhaps in areas where employee benefits are not so developed, something more could be done,” he says.

“If commercial advisers want to be partners in this, or become accredited for Money Guidance, then fine. I don’t think there is an obvious commercial benefit for them to do this. It might, though, give them an opportunity for different relationships to be developed through bodies such as chambers of commerce, to engage with employers as a group, used as a simple introductory service,” says Thoresen. “I know IFAs are already active in doing pro bono work in this territory, and if this became more widespread, then this could be a cost-effective way for them to do it.”

So what of the experience of carrying out the review? Has it helped Thoresen or been a pointless drain on his time? He believes the exercise has given him a greater understanding of his customer base and of the environment in which his company is operating. This effect is most evident in terms of understanding, he says.

“There has been a significant benefit for me personally to step outside the industry and see it from a different perspective. It is amazing how much we take for granted about how much people understand us. We need to be more proactive about good communication. We have come a long way on communication but we still have a long way to go,” he says.

The Thoresen Report