Following the update on 3 August setting out the basis of a review, the FCA and HMT have now issued Discussion Paper 23/5 on the Advice Guidance Boundary Review – proposals for closing the advice gap.
Despite already having had extensive ‘behind the scenes’ discussions with the industry, the paper is high level. The FCA and HMT are keen to hear views on the three proposals outlined, or any other ideas. The paper notes the many join-ups there are with other ongoing regulatory initiatives.
The key proposals laid out are:
In this article I’ll summarise the aims and key proposals of the paper and what this could mean for the future of the advice gap. All information is taken from Discussion Paper 23/5 on the Advice Guidance Boundary Review.
Aims
The Discussion Paper’s aim is to tackle the long standing ‘advice gap’ – ‘to make sure consumers receive the help that they want, at the time they need it at an affordable cost, so that they can make informed decisions.’ It talks of creating a ‘continuum of help, guidance and advice’, without the current ‘cliff edge’ between advice and information. There’s a commitment to making sure ‘existing advice services continue to thrive’. There are frequent references to utilising technology, data and the digital environment as one means of addressing the advice / support gap.
The key proposals
The FCA and HMT could take forward any or all of the following:
1. Further clarifying the boundary
This follows on from previous initiatives from FCA to give firms greater certainty over what support they can provide without risking it being deemed ‘advice’ / a personal recommendation. One new idea is ‘in appropriate cases we could also consider rules mandating specific actions’. A recent example along those lines is offering investment pathways to non-advised investors. Without rules, firms might well have considered this as potentially crossing the advice boundary.
2. Targeted support
Here, the paper explores a new regulatory framework which would allow firms to broaden the support they offer consumers based on a limited set of data and information. Rather than fully individualised support, the outcome would be a suggested product or list of products or course(s) of action based on the target market the consumer has been identified as belonging to. This could be referred to as a ‘people like you’ approach. The paper suggests target markets here could be aligned with those used within the Consumer Duty.
Examples suggested are to support non-investors with investing, to suggest better options to those accumulating wealth (like cheaper tracker funds) or to support wealth decumulation decisions such as pension income withdrawal rates.
The support could be offered without explicit separate charges, so there would be no RDR-style Adviser Charging. However, there could be no commission arrangements.
There would be potentially extensive disclosures on matters such as what the service is and isn’t, how it’s funded, explaining the data it’s based on, the range of products considered and alternative forms of support available, including full regulated advice.
The FCA and HMT ask for views on whether targeted support should be limited to better decisions on existing products. If it could also include suggested new products, should there be a requirement to include a short list of suggestions, or might it be allowable to suggest a single new product?
Getting closer to more personalised guidance
We have long argued in favour of a more personalised form of guidance to be offered alongside regulated advice. This proposal is the closest the discussion paper comes to this. However, we have always seen this as a service which could be offered by both adviser firms and providers.
The paper states ‘As it is important consumers understand targeted support is different from advice, it is not clear such a service could be provided by a financial advice firm.’ But restricting to product manufacturers may significantly limit the benefits to consumers of targeted support. More personalised guidance would lend itself to advisers and EBCs using such services to support members of workplace pensions who don’t currently access individual advice.
Furthermore, firms may only be allowed to offer targeted support if consumers make a clear positive choice to receive it. This may be designed to stop targeted support being used as a form of direct selling. However, it could be equally if not more valuable in helping individuals make the most of products they already have. There’s a link here to avoiding foreseeable harm under Consumer Duty.
3. Simplified advice
The FCA is revisiting and proposing to extend the simplified advice concept from the ‘core investment advice’ it consulted on last year. Core investment advice was designed to support individuals with excess cash to invest it in a mainstream stocks and shares ISA. It would have been a once only advice event, with an upper limit of £20,000. The industry was united in viewing this as commercially non-viable.
The FCA explains the difference between its new version of simplified advice and targeted support as follows:
‘Targeted support would enable firms to use limited information to suggest products or courses of action based on a target market the consumer has been identified as belonging to. Simplified advice would result in a recommendation that is personalised to an individual consumer’s circumstances – i.e. “you specifically” would benefit from this action.’
Firms would need to have authorisation to offer simplified advice. My interpretation of the paper is this is the key new approach for firms with advice permissions, with targeted support for use by providers. I’d like to see adviser firms being able to choose from both these options – delivering on the ‘continuum’ the paper talks of.
With an aim to make this more commercially viable, the latest simplified advice proposals could support investing a lump sum or reviewing an existing investment, up to £85,000 in line with the FSCS limit.
However, all pension decumulation decisions would be excluded as too complex. This begs the question of how to close the ‘advice’ gap there, and also seems at odds with being able to use targeted support for pension decumulation decisions.
The core investment advice proposals included lighter training and competence requirements. But unless simplified advice were restricted to a single narrow product, the FCA no longer feels T&C standards could be reduced. While logical, this will challenge its commercially viability.
The paper asks for suggestions for making it easier / more attractive for consumers to pay for simplified advice without undermining the principles of the RDR. This implies less flexibility than when paying for targeted support.
Other aspects mentioned in the paper
Outside of the three key proposals, the Discussion Paper also considers:
- Compensation arrangements – whether FSCS protection should be available for all three options.
- Privacy and Electronic Communications Regulations (PECR) and other direct marketing rules – whether these will cause problems with any of the proposals.
- Impact on competition – including any specific aspects for larger or vertically integrated firms.
- Considerations for pension scheme trustees – in other consultations, trustees have expressed concerns over what support they can safely provide.
These could be important considerations in turning the proposals into workable support mechanisms.
Next steps
The FCA and Treasury are looking for responses by 28 February. They also plan to engage with stakeholders through roundtables and meetings and as specific policy proposals emerge, to undertake consumer research. All of this will be considered alongside the broader legislative framework as the FCA updates its Handbook post Brexit.
While 2024 may be too soon to see any major changes, this is an important development and I’d encourage advisers to make their views known.