I’m getting increasingly excited (yes, sad I know) about the Treasury and FCA’s holistic review of the advice/guidance boundary. The latest FCA update on 3 August set out the basis of the review. It confirmed the aim is to ‘ensure that customers get the help they want, at the time they need it, and at a cost that is affordable, to help them make informed financial decisions’. That’s an aim I’m sure we can all get behind.
Addressing the ‘support gap’
I'm a huge supporter of advisers who through their advice services continue to serve millions of clients each year. But since the Retail Distribution Review (RDR) in 2012 – which was successful in raising standards of professionalism and transparency – it’s been clear that regulated advice can’t be provided to everyone. There’s a very significant ‘advice gap’ which the Financial Advice Market review (FAMR) in 2015 was tasked with closing, without success. With currently few options alongside full regulated advice, there’s an ever widening ‘support gap’, made more pressing by the rise in the cost of living. So, I was particularly pleased to see the FCA admit that ‘the challenge will not be met by changes to regulated advice alone’.
In this article, I’ll break down the following points:
- The long-standing problem of clarity between advice and guidance
- The potential impact of Consumer Duty
- The way forward – a more personalised form of guidance?
1. Advice/guidance – the persistent problem
The industry has long stressed how difficult it is to provide meaningful support to individuals without the risk of crossing the line into ‘regulated advice’. Based on the Markets in Financial Instruments Directive (MiFID), the FCA rulebook defines investment advice as ‘the provision of personal recommendations to a client, either upon the client’s request or at the initiative of the firm, in respect of one or more transactions relating to designated investments’.
The latest FCA update reminded us of the definition of a personal recommendation – ‘a recommendation made to an investor or potential investor in relation to a security, structured deposit, or a relevant investment that is presented as suitable for the person to whom the recommendation is made, or is based on a consideration of that person’s circumstances’.
The update also includes some helpful examples of what’s already permitted without crossing the advice line. But it remains the case that communications which go beyond generic information – and/or which are sent direct to individuals – risk being considered as ‘personal’. And any suggested course of action could be construed as a ‘recommendation’. Consumers are very unlikely to understand the difference, and as long as ambiguity remains, firms will be wary.
2. Consumer Duty
In FCA land, the Consumer Duty is focusing on delivering good outcomes. One aspect is demonstrating the value to retail customers of both products and services, including advice services. Ironically, this could make the advice gap even bigger if the cost of advice to certain groups such as those with low sums to invest cannot be shown as offering value.
The FCA recently consulted on allowing firms with advice permissions to offer streamlined ‘core investment advice’ to help clients move excess cash into stocks and shares ISAs. While the broad concept may have appeal, the commercials of this specific approach don’t stack up. The FCA has paused this particular initiative and is instead absorbing it into the wider review.
3. A way forward
We could be on the cusp of a radical rethink. The Investment and Savings Alliance (TISA) has been doing some great work behind the scenes on designing a proposed ‘regulated financial guidance’ regime, which I’ve been very pleased to contribute to. This could address the reluctance to offer more tailored guidance found in the review of the impact of RDR and FAMR. I’d really like to see the Treasury and FCA’s advice/guidance review create a new permission which FCA regulated firms could apply for, to offer this more personalised guidance.
One key difference is a firm would be allowed to take into account some personal attributes of the individual – without that automatically being deemed advice. I see this as being used both proactively and reactively.
A reactive approach
First, how could this be used reactively? A firm may be approached by a consumer seeking support, where advice would be disproportionately costly, but where their needs can be met without full advice. Provided the regulations around certain factors – for example factfinding and qualifications – are lighter and therefore less costly, the firm could offer a personalised guidance service at a price which meets the Consumer Duty value test.
A proactive approach
Firms could also proactively offer more personalised guidance to existing customers. Based on data they hold, they might want to suggest better uses of products already held or courses of action to consider to avoid foreseeable harm and drive good outcomes. This might be offered free of charge.
The aim would be for this guidance service to complement advice. It would offer more limited support and the difference from advice would need to be highlighted. But it could still be of real value to lower wealth individuals in a range of areas. For example, think of the many millions of individuals who have been auto-enrolled into workplace pensions. Few of these members receive individual advice but many would benefit from guidance on aspects such as adequacy of contributions, considering investing outside default funds, consolidation and making early preparations for retirement choices.
New choices for advisers
Advisers and their professional advice services have proven very resilient to the changing world. We must make sure they continue to thrive. But to complement this, I think it could be really beneficial if those firms who want to, were permitted to offer a new more personalised guidance service. This might allow them to support currently unreachable client groups, getting them on the road to good Consumer Duty outcomes. And once these clients begin to appreciate the benefits, they’re much more likely to return to the adviser for full advice when they need it.