New rules mean long term care advisers will soon have to take competence exams. Tish Hanifan explains why this is a positive move for the market
What constitutes best advice in the long term care (LTC) market? This question will soon be answered when LTC regulation takes effect on 31 October this year. The Financial Services Authority (FSA) has just published its policy document on the rules, which state regulation will be of both the product and the advice process.
Competence
The FSA has decided to require both existing and new LTC advisers to pass an appropriate exam in order to demonstrate their competence. This will be subject to a temporary 'grandfathering' arrangement. This means that all advisers including those currently deemed to be competent to advise on LTC insurance will need to pass an appropriate exam within two years of the rules coming into effect. The new regulatory regime will also introduce enhanced training and competence requirements for all LTC insurance advisers and supervisors.
The new examination and the enhanced training and competence regime will be used to benchmark competent advice. The broad knowledge base that will be required following regulation will greatly assist the adviser to identify the areas where the implications of funding care will have an impact on their client's estate.
An example of this can be found where an adviser is identifying financial shortfalls in relation to pension planning. The male client may well be the one with the greater pension particularly where you are dealing with older clients. When the issue of financial provision for the spouse arises there will often be a potential shortfall identified should the husband die before his wife. The strategy favoured by the client may be that the surviving spouse could sell the family home and trade down, thereby freeing equity, which could be invested for income.
In that case the suitability of this approach should be compared with the situation where the husband does not die but rather enters a care home. Here knowledge of care funding matters would allow the adviser to explain the limits that would be imposed on this by a local authority seeking to place responsibility for paying for his care onto the husband. The consideration of the role of equity release for the 'capital rich, cash poor' would also necessitate an understanding of local authority charging procedures, should the need for care arise, whether in a domiciliary or residential setting.
An adviser who was not aware of the impact of these charging procedures would not have identified a potential problem for the client. Negligence by omission could arise.
Similarly many advisers have clients with small businesses. They will advise them about the options relating to protection, such as key person insurance, but may not know enough about the local authority charging procedures to analyse the effect these could have on succession planning. Will the assets of the business be included in the means test of the older partner who is phasing their retirement, or as often happens, using the family business to fund their retirement?
Care funding may not have been on the agenda in any of these, but it clearly has important and potentially detrimental consequences for the financial picture of their retirement.
We all increasingly have to develop a specialisation. However we come to it, the common denominator for success is the need to develop a knowledge base, which is sufficiently broad and deep to underpin the advice we offer.
Opportunities
One area, which has attracted considerable interest in the last 10 years, is the planning and funding of an older person's care needs. Many firms offering legal and financial advice now have an older client adviser within the practise. The press, from which so many people take their advice, regularly devote numerous column inches to the subject of planning for care.
However despite the best efforts of the product providers, the take-up of LTC plans has not reached their expectations or projections. In consequence some of the providers have withdrawn from the market and others have reduced their exposure.
This is a disappointing, although understandable, reaction. Clearly this 'rationalisation' does not inspire confidence in the advisers already in this market nor does it encourage the many advisers who have considered working in this area to make the move to do so. However the industry statistics mask some important opportunities.
The market for LTC and the equally important area of the surrounding related advice can never be measured purely in terms of the number of policies sold.
To do so ignores the funding solutions that are frequently achieved by making changes to the investment portfolio of the client. These changes very often mirror important changes in the lifestyle and needs of the older person.
Arguably these needs should have been addressed earlier. Some older people do have a family financial adviser and they will have had good advice and made the necessary changes. However many will have muddled along with a combination of family solicitor, accountant and perhaps a stockbroker. It may take something as fundamental as the need to fund their care needs to prompt them to take more specialist advice.
A review of their current investment strategy often results in a financial solution that will allow them to fund their care without purchasing a LTC plan. Sometimes this is achieved with a combination of the older person's funds and that of their children.
These situations are not reflected in the industry figures, which appear to paint a more depressing picture of the health of this market.
Another hidden factor, which also artificially depresses the potential market, is the number of situations where the adviser fails to recognise that the issue of care funding is relevant or that it may have an impact on their client's stated objectives. Advisers often say that they intend to enter the LTC market "when it takes off." A closer examination of what this means frequently elicits the response that this will be when their clients ask about it.
This is extremely short-sighted and will undoubtedly result in lost business, but more importantly litigation looms on the horizon. We live in an increasingly litigious society. The growth of 'no win, no fee' legal services has rapidly expanded the opportunity for people to look for somebody else to blame and more importantly, to compensate them. Combine this with an important recognition within the legal process that advisers are as liable for the advice that they don't give as for the incompetence of the advice that they do give, and this strategy of client-led advice seems positively dangerous.
Litigation
Identifying the areas where addressing care funding matters may be necessary requires both a broad understanding of LTC and related areas, in addition to an in-depth knowledge of the solutions available.
Many of the areas, which an adviser would need to know in order to give best advice and thereby stave off that litigation claim, are specific to LTC planning. The adviser would therefore need to build up a specific knowledge base to be able to work effectively in this area, which is widely recognised as being both complex and specialist.
Regulation will require those advisers who are working in this market to have the knowledge base which underpins competence and which will allow them to recognise the wider care issues in numerous situations. This greater understanding of the implications of funding care will certainly open up opportunities for the adviser who is looking to increase their knowledge and then to focus on the older client market.
One of the objectives that the FSA has to achieve with regulation is consumer protection. This can only be achieved by a training and competence regime which allows the client to identify advisers who have demonstrated the requisite level of competence. There are many older people and their families who are in need of access to high quality financial advice, which will make all the difference to their lifestyle in their latter years.
This advice will also require an understanding of the legal aspects where a third party may be involved in the decision-making process. The enhanced training and competence requirements will ensure that advisers fully understand the rules relating to Enduring Powers of Attorney and other forms of 'substituted decision making'.
The implementation of regulation will allow an adviser to enter the market with the confidence that there are industry standards against which to benchmark competence and keep the threat of litigation from their door.
On top of this, an interesting side effect of this much-needed regime may be that it is a catalyst in developing the LTC market in line with the demographic time bomb of an ageing population.
Tish Hanifan is a barrister and director of education and training at IFACare, an organisation for advisers who have an interest in LTC and related older client work.
•Advisers wanting more information about IFACare should call 01562 881888.
Cover notes
LTC will come under the FSA's regime in October 2004, when all advisers will be required to take new competency exams and specialist training.
Due to the complex nature of LTC planning, exams will help ensure advisers have the correct knowledge base.
New regulations should help increase confidence among consumers and also among advisers working in the market.
