In an attempt to provide greater support for people’s financial decisions, the Financial Conduct Authority (FCA) and the Government are proposing multiple changes and simplifications to the existing advice regime to allow more people to access advice or support to help make their money work harder.
The advice gap refers to the disadvantage many people face who cannot afford to pay for good quality holistic financial advice. This results in those with more modest investments without access to personal financial support and left to rely on general and impersonal ‘off the shelf’ guidance from the public domain.
The potential options outlined by the Advice Guidance Boundary Review aim to help more people benefit from investment opportunities, provide for later life, save for major expenses or tidy up their finances.
The FCA and Government are seeking views on three proposals to help people make more informed investment and pension decisions, including:
- Further clarifying when firms can give consumers support without giving regulated financial advice.
- An innovative new approach allowing firms to provide support tailored to groups of people in similar circumstances.
- A new form of simplified advice that makes it easier for firms to provide affordable personal recommendations to clients with more straightforward needs and smaller sums to invest.
The FCA’s Financial Lives survey found that only 8% of UK consumers received full financial advice in 2022. With core financial skills missing from most school curriculums and financial advice not readily available to many in later life, these proposals seem timely and integral to the financial well-being of the population for the future.
What does the industry have to say?
Many prominent individuals and businesses working actively in the financial services sector welcome this review and the changes proposed; here’s what they have to say.
Jamie Jenkins, Director of Policy, Royal London, said:
“This is a step-change from the Regulator in trying to tackle the advice gap. For those who receive professional advice, the benefits are clear, but the journey to that point is built around a framework that is so risk-averse that very few people are receiving any meaningful guidance along the way. This is a welcome intervention to attempt to change that.”
Ben Hampton, CEO of Wealth Wizards commented:
“This feels different to previous attempts to solve this puzzle. The FCA and Treasury are breaking new ground with a Policy Paper, signalling a shift for quicker, more impactful feedback, rather than a traditional Discussion Paper route. The pace of change feels progressive, as an industry we all need to step up to accelerate better access to financial help.
Steven Cameron, Pensions Director at Aegon, said:
“We welcome the latest Discussion Paper from HM Treasury and the FCA on how to tackle the highly persistent but increasingly important advice and support gap. While regulated advice is highly valuable, it’s widely recognised that not everyone is able or willing to pay for it, meaning there’s an urgent need to have alternative routes to support with financial decisions. We welcome the commitment to ensuring ‘existing advice services continue to thrive’ and the aim of having a ‘continuum of help, guidance and advice’ rather than the current ‘cliff edge’.”
James Carter, Head of Platform Policy, Fidelity International, comments:
“Today’s paper is a step forward by the FCA and government in marking their shared commitment to working with industry and consumer groups to close the ‘advice gap’ and will allow for welcome discussion about the development of a legislative and regulatory environment which creates opportunities to provide further support for consumers making financial decisions.”
What are the upsides?
The positives to this review and proposal may seem obvious to many of you, and so it begs the question, why now? Considering the positive impacts these changes could have, especially on those with more modest wealth, why has the ‘advice gap’ not been addressed earlier?
Nick Eatock, intelliflo’s CEO, comments on the benefits the proposed changes could bring and why he thinks, if followed through, this could be a leap in the right direction to addressing an issue that is decades old.
“Early access to advice is proven to significantly impact individuals’ assets, as demonstrated by a 2019 study from the International Longevity Centre and Royal London. Those who received advice saw their pension and overall wealth increase by an average of £47,000 in a decade, compared to those without advice. This impact was particularly pronounced among individuals with lower incomes.”
“Most financial decisions are complex and carry significant consequences, like how to use your investments to provide a sustainable income in retirement. These are choices that are unlikely to fit within a simplified advice regime but will still need to be made by people at all levels of wealth. And, again, those with lower assets, who are less able to cope with the financial impact of poor decisions, would arguably benefit more from professional advice.”
Are there any downsides?
Despite the obvious advantages of improvement to the ‘advice gap’, there are also some out there who think that care needs to be taken to retain the separation between official advice and general guidance so that clients retain the protections and standards that are connected with regulated financial advice.
AdviserSoftware.com’s founder, Ian McKenna explains:
“While it’s good news that the FCA is recognising that financial advice has become uneconomic for the overwhelming majority of consumers, it’s crucial they don’t dilute the advice boundary too far.”
“Currently, it’s far too easy for non-advised services to present themselves to look exactly like advice, but without providing the customer protection of a fully regulated service. We stress the importance of a clear and unambiguous health warning whenever non-advised guidance is being provided as opposed to advice, where the consumer is fully protected. They should be simple statements similar to the health warnings applied to recommendations on mortgage and investment products.”
“Advances in industry technology are taking us closer and closer to a situation where advice, automation and hybrid processes can make financial advice a utility available to all which is where it needs to be. There is substantial evidence that large numbers of younger consumers, are seeking a different experience to their parents.”
“Advice can be made far more affordable by new technologies that a growing number of firms are adopting. Having achieved a level of advice standards that are recognised internationally as being among the highest in the world, it is crucial not to reduce consumer protection but take full advantage of all that technology can deliver.”
Caitlin Southall, Pensions Technical Manager, Curtis Banks says:
“Put simply, more people need access to financial advice. With pension dashboards on the horizon, and the potential of the ‘pot for life’ being introduced, people need to be able to access advice on their finances to avoid the potential of bad outcomes. Whatever the outcome of the advice/guidance consultation, it’s vital that financial advice isn’t diluted, and that the value of financial advisers is not lost or overlooked. We need to close the advice gap and offer better opportunities to secure good outcomes. However, the value of a holistic financial planning view shouldn’t be overlooked. The FCA will need to hit a very tricky balance in order for any of their proposals to be successful.”
Is current regulation hindering rather than helping?
On closer inspection, it would appear that what may be getting in the way of real change, is actually related to current regulation. Over the years, the financial advice sector has undergone many transitions, regulatory changes and overhauls, but are these amendments, whilst well-intentioned in their time, now doing more harm than good?
With Consumer Duty being the most recent change in regulation and MIFID not far behind, and with both being quite a drastic tightening of the guidelines, we look at how this may be affecting the ‘advice gap’ and what could and should be done about it.
Jenny Davidson, Commercial Proposition Director at Quilter explains:
“Regulators have been grappling with the advice gap – which is really a ‘help gap’ – since the Retail Distribution Review largely removed mass market bank advice. Today’s proposals aim to address this. The introduction of pension freedoms in 2015 also put greater onus on the individual to make critical decisions about their retirement funds, making the need for easily accessible help even greater.”
“The introduction of the Consumer Duty means financial services firms need to think about ways that they can get closer to the advice/guidance boundary where they can demonstrate it would help to avoid foreseeable harm. But many firms are still nervous about the perception that FOS interpretation can diverge from regulatory intention. It needs a concerted effort between industry and regulators to really drive change and give firms reassurance through clear advice/guidance boundaries and regulatory frameworks set up specifically for lighter forms of advice or enhanced forms of guidance.”
“There is space for more sensible product guidance that is not based on personal information but utilises data on how the majority of people use certain financial products. The FCA’s commitment to explore the idea of ‘people like you’ nudges for non-advised savers is a good idea that could be critical to helping people avoid the kinds of choices that could be catastrophic for their later life finances. However, forms of ‘personalised guidance’, which has been previously suggested but are not in the FCA’s paper, would likely be a step too far and risk consumers misunderstanding what they are receiving, and a lack of clarity as to who is responsible for the decision.”
“At the same time, the financial advice and wealth management sector needs to work with the regulator to really shape what an effective and commercially viable model of simplified advice looks like so that more people see investing for their future as a viable option. The regulator is right to exclude decumulation products, which involve the kinds of decision requiring full advice.”
“A change in definition away from the rigid interpretation of the term ‘personal recommendation’ under MIFID is also essential and it’s reassuring to see the FCA raises this point. While we recognise the importance of a defined boundary between advice and guidance, this interpretation has resulted in a difficulty in the provision of focused help in the face of clearly harmful client decisions, potentially limiting the scope of aid firms can offer customers.”
“In the cases where a customer strays far from the norm, a provider should be able to suggest they make sure they are aware of the ramifications of their actions. This could help prevent foreseeable harm – a central tenet of the Consumer Duty.”
“While we firmly stand behind the existing distinction between advice and guidance, we welcome a broader scope to better meet the escalating demand for accurate and educational help for consumers. We want to work to optimise the use of product guidance and advice, but without blurring the crucial distinction between the two.”
Tom Selby, director of policy at AJ Bell, comments:
“Ensuring Brits are able to access the help and support they need, either through regulated advice or guidance, is critical to building financial resilience in the UK. The existing regulatory framework makes it difficult for firms to offer anything beyond relatively basic information to customers without risking straying over the boundary from guidance to advice.”
“Furthermore, the cost of providing regulated advice – in part due to regulation – means many people who could potentially benefit from advice do not receive it.”
“The measures proposed under the ‘targeted support’ plan could allow firms to give people much more help to make informed financial decisions. This has the potential to be a gamechanger, saving consumers time and money and leading them to a better financial outcome. Some of the examples cited by the FCA – like alerting consumers to the danger they may be under-saving for retirement or making people aware that they’re holding an unnecessarily expensive tracker fund – illustrate how people could benefit from their provider pointing them in the right direction, without advising them on exactly what to do.”
“We also hope that, over time, any mandatory, generic communications that are proven to offer little value to customers can be removed and vague information made more relevant and helpful.”
I propose, we propose, a proposal.
The danger with a lot of these ‘proposals’ is that they remain just that, an idea that loses traction and eventually disappears into the ether to come up again in another ten years.
This is usually because it conflicts with another piece of legislation already in place, and nobody wants to admit they may have been wrong, or that they may not have fully thought through how previous changes affected other areas.
But if it’s broken, fix it. As mentioned above, to improve the ‘advice gap’ a joined-up approach is required. That means regulators working with financial professionals and then giving real consideration to how this may contradict existing regulations and addressing those conflicts head-on.
This would ensure what is implemented is clear and relevant, addresses the issue at hand, tidies up any loose ends and brings tangible value to those who would really benefit.
