With a further carve-up of the UK pension landscape, regulatory reforms in the advice arena and a possible vote on whether to remain in the EU, 2016 promises to be a busy year.
2015 will be remembered as something of a tumultuous 12 months for the financial services industry. Grave concerns over slowing Chinese growth and a dramatic and ongoing commodity price rout combined to drive the FTSE to a 5% loss and create something of an annus horribilis for investors.
The early signals suggest 2016 will be just as bumpy a ride. Indeed, the U.K.’s leading blue chip index fell sharply in the first trading session of the year, plunging 2.4% into the red (to register its worst start to the year since 2000) on the back of disappointing Chinese economic data and escalating tensions in the Middle East.
The UK market’s volatile start to 2016 followed the suspension of trading on China’s stock markets after the CSI 300 Index plunged an alarming 7%.
Such early volatility in markets does not bode well and will likely be a prelude to what promises to be a year of more uncertainty and upheaval in the wider financial services industry.
One sector set for such upheaval (ahem… more upheaval!) is that of pensions.
The introduction of pension freedoms in 2015 marked a radical overhaul of the system and a further carve-up of the pension landscape is on the cards for 2016. A cut in tax relief on pension contributions — or even the complete elimination of pension tax relief and the introduction of a pension ISA — could be announced in the March Budget. These will form part of a wider raft of pension changes which could include the abolition of the lifetime allowance and annual allowance as the Government struggles to deal with the demographic time bomb of an ageing population.
Those saving for retirement could also be hit by a further rise in the pension age and adjustments to defined benefit, or final salary pensions, which will make them less generous.
On a brighter note, however, the Government will look to iron out some of the issues arising from the pension freedoms introduced last year — which were meant to give individuals autonomy over how they spend and access their pensions but in practice saw lengthy delays and consumers hit with high exit fees in some cases.
2016 will also see the introduction of a new single tier state pension of about £155 per week (although not all retirees will get this amount if they have not made enough national insurance contributions) and rules clarifying plans for a secondary annuity market.
Meanwhile, downtrodden investors looking to equites as a source of income could be in for more bad news in 2016.
Last year, banking behemoth Standard Chartered and mining major Anglo American announced they were suspending dividends. With the average dividend cover for the UK stock market now at a 20-year low, 2016 could turn out to be the year of dividend crunch if more companies follow suit and cut or suspend dividends.
Elsewhere, bond investors will be closely reading the minutes of MPC meetings for any indication that the Bank of England will follow the course taken by the Fed in December 2015 and increase rates. As we all know, with interest rates usually having an inverse relationship with bond prices, any increase in rates will see a fall in the price of most bonds.
A rate increase would also spell bad news for mortgage holders or those looking to get on the increasingly steep UK housing ladder. Conversely, a rise would be welcomed by savers who have suffered at the hands of the central bank’s historically low rates. However, some experts think it highly unlikely that Bank of England chief Mark Carney will move to raise rates this year given the U.K.’s stubbornly low inflation and stuttering economic performance.
It will also be interesting to see how the Fed’s reversal of its extraordinary monetary policy will play out in terms of the wider impact on global markets. The divergent monetary policy pursued by Europe and the U.S. throws up a real and unprecedented challenge for the ECB and the Fed and one in which the Bank of England will surely keep a close eye on.
Elsewhere, financial advisers in the UK will be bracing themselves for what could prove another tumultuous year. In April, advisers will no longer be able to accept trail or ongoing commission from investment management companies. Many experts predict the ban will see swathes of advisers quit the industry in much the same way as they did after the introduction of the RDR. This will only serve to exacerbate the advice gap stemming from the RDR.
The rise of robo-advice has been touted as one potential solution to the advice gap and this emerging industry will no doubt continue to develop and evolve. But the robo-advice sector is still in its infancy in the UK (unlike in the US where it is far more advanced) and will unlikely gain major market traction in 2016. Rather than being seen as a solution to the advice gap, or indeed as a threat to IFAs, advisers will perhaps adopt such online offerings as just another string to their bow and consider them a complementary component of a broader advice package.
The regulatory arena, however, in the shape of the Financial Advice Market Review, could offer hope for those advisers still struggling in the post-RDR environment. While the FAMR — the brainchild of the Treasury and FCA — is broad in scope and ambition, it is hoped that it will address those regulatory constraints and risks that some deem responsible for the advice gap. And advisers will surely welcome a clarification of some of those more confusing and ambiguous industry terms such as “advice” and “guidance”.
While it remains unclear how robo-advice will evolve in 2016, what is certain is that technology will continue to disrupt and leave its mark on the asset management industry. So look out for developments in the insurance space as the “InsurTech” scene continues to evolve (SAFER and CoVi Analytics are just two companies to watch) and insurance companies create lifestyle apps for mobile phones. And Blockchain, the power behind digital currency Bitcoin, will undoubtedly continue its assault on the insurance market. Meanwhile the platform space, which some experts claim is lacking innovation, could see some interesting developments as players look to add robo-advice arms and start developing broader, one-stop-shop financial service offerings.
One thing that 2015 taught us is the futility of predicting the markets. At the start of 2015, some bullish experts predicted that the FTSE 100 would rise to 7,700 and beyond over the course of the year. The index eventually closed at 6,242. The lesson is that any number of unknown economic or geopolitical risks could emerge in 2016 to send global markets into a prolonged tailspin.
One event which we do know is looming on the horizon is the UK’s vote on whether to remain in the EU and this could have far-reaching ramifications. Although the vote does not have to be held until the end of 2017, UK Prime Minister David Cameron might decide to hold it in the Spring of this year. And the uncertainly leading up to the vote, especially if the Eurosceptic or no camp were seen to be in the ascendancy, could create a huge amount of market volatility.
While the hope is that this year turns out to be better than last, nobody quite knows how 2016 will pan out. To quote Donald Rumsfeld: “There are known unknowns. That is to say there are things that we now know we don’t know.”
The problem as we begin the year is that there are also many unknown unknowns which will become apparent as the year unfolds.