The Advice Guidance Boundary Review – can the financial services industry help more consumers to make good financial decisions?
The FCA and the Government are currently conducting a collaborative review, known as the Advice Guidance Boundary Review (the Review), of the regulatory boundary that sits between highly regulated financial advice and mere information and guidance. A consultation paper is open for feedback until the end of February 2024.
The Review forms part of the UK’s post-Brexit drive to tailor the UK’s financial services sector to the UK’s needs, delivering smarter and more agile, future-proofed regulation which encourages investment, and facilitates innovation and economic growth.
The aim
Broadly, the mission for the Review is to ensure that everyone has access to financial advice and not just those who are wealthy, so that everyone has the support that they need to manage their finances and make informed financial decisions. The vision is for an investment environment where consumers have enough understanding to invest with confidence, and that includes having an appropriate understanding of risk, and are appropriately protected when things go wrong.
The challenge
This is not the first time that the regulator has looked at the possibility of filling the space between financial advice and information and guidance. It is not going to be a simple or a quick fix, there have been previous attempts over the years that have failed to gain traction with industry and recently several more consultations and proposals have been exchanged between the regulator and industry. However, post-Brexit and with the benefit of recent technological advances there potentially exists a new opportunity to devise a restructuring of the current regulatory framework that could make a real difference both for consumers and for industry.
Technological advances
One key to achieving progress in this area is proportionality and an associated recognition that not all consumers are the same and that not all consumers need full regulated advice. Another key is technology, where recent advances in the solutions available to firms mean that they have the potential to develop innovative solutions to address the varying needs of the diverse consumer demographic and to do so cost effectively. Cost effectiveness for firms should result in increased accessibility and affordability for consumers, open a range of options for more people and thus provide the opportunity to improve the long-term financial wellbeing of the UK’s population.
Poor access to advice
The Review comes at a time when it is well known that people are struggling and the cost-of-living crisis continues to bite. It is also known that people have difficulties making sound decisions about their finances at a time when they have more choices about how to invest their money and pensions than ever before. The FCA’s Financial Lives Survey (2022) revealed that only 8% of adults had taken financial advice in the previous year and that those who had investible assets of over £250k were the most likely to have taken advice. The statistics go on to suggest that a bigger slice of the population (24%) made use of information and guidance from a range of sources including free guidance organisations, workplace schemes, social media and friends and family.
It is a concern that without appropriate support consumers will make poor financial decisions about their financial affairs including their pensions, the cash they hold, saving for their retirement, and the type of investments they select, with a particular risk in relation to the latter that consumers will engage with high-risk investments that they do not understand.
Consumer Duty
There is clear scope for more consumers to benefit from more support. To achieve this, there is a view that a significant change needs to be driven through the traditional financial advice market so that a more flexible and innovative system can evolve, within which traditional advice services can still thrive, but around which there are more diverse options available that are suited to the varying needs of more people, and importantly, in which people can place their trust as they make their financial decisions.
The Consumer Duty is intended to be a central pillar of a future regime where consumers can invest with confidence and to this end the Review is primarily focused on the support that is available to consumers in the retail investment and pensions sectors. There will therefore be overlap with other regulatory initiatives which are aligned to the same end goal of a well-functioning consumer investment market in which consumers get good outcomes, including:
- Developing the Smarter Regulatory Framework to provide rules that are agile, adapted specifically to the UK, and work effectively;
- Simplifying and digitalising the ISA markets to make it easier for consumers to invest in this space;
- Driving positive consumer behaviours and supporting this with appropriate consumer protections and with the associated costs levied across regulated firms in a sustainable way;
- Creating a future-proofed and transparent disclosure regime that supports retail consumers in their decision making, enabling informed financial decisions, including for those who choose to invest in environmentally friendly and sustainable products; and
- Developing pensions dashboards which will provide consumers with accessible information about their pensions and empower them to make informed decisions about how to plan for their retirement.
Mind the gap
The distinction between regulated or holistic advice and information and guidance has been difficult to navigate and placed barriers in the way of good outcomes both for firms and for consumers. Traditional holistic advice which requires regulatory permissions and requires firms to take an overall picture of a client’s financial position tends to come with a significant, often ongoing, price tag. On the other hand, information and guidance, may be free of charge but generic and, significantly, can lack the kind of human engagement which many consumers value especially when making life’s more complex decisions. Research seems to show that many consumers do not feel confident enough to make more complex decisions without a personal recommendation or reassurance from another human being. In turn, there are firms who would like to do more to support customers but fear the potential regulatory consequences of making personal recommendations and in so doing crossing the regulatory boundary and / or they cannot make an economically viable case to do so.
The three proposals
The Review puts forward three proposals to narrow the advice gap and enable the provision of more support for consumers enabling them to get the support they need to manage their finances at affordable cost. While the first proposal would not significantly change the regulatory picture, the second and third proposals are more ambitious:
- Proposal 1: clarification of the boundary that exists within the current regulatory framework with more or simplified guidance to firms about what does not constitute a personal recommendation, with a view to giving them the confidence to provide consumers with more support and encouraging them to come closer to the advice boundary without the fear of crossing it;
- Proposal 2: a new option of targeted support enabling firms to broaden the support that they can offer to consumers based on limited (rather than comprehensive) information about those consumers by reference to the target markets with which those consumers are identifiable (rather than entirely bespoke advice), encompassing the use of technological innovations and improved use of customer data to deliver accessible and cost-effective solutions; and
- Proposal 3: a new form of simplifiedadvice which will enable firms to support consumers with less complex requirements and smaller sums to invest.
The wider support ecosystem
It is the intention that any new solution sits within the existing and wider support system, parts of which already seek to support consumers to make good financial decisions and help those who are most in need to obtain advice about money, debts, and pensions. Any solution is also intended to form part of a robust regulatory framework which protects consumers from harm and enables them with the information that they need to understand the distinctions between the different kinds of information, advice and support that is available, and go on to make good financial decisions based on the support that they choose to take.
Clarifying the boundary
The FCA recognise that firms are currently providing less support to consumers than they would do if there was greater clarity within the existing regulatory framework. The FCA has previously tried to clarify the boundaries around advice, personal recommendation, and guidance, but has arguably not done so sufficiently to overcome the caution of some firms not to overstep the boundary lines and concern around the future view of the FOS. There is a concern that hesitancy on the part of firms could lead to consumers getting less access to support than they might otherwise have.
The FCA has expressed an intention to provide greater certainty so that more firms are more confident to move from a risk averse position of providing only basic, generic information to a place where they are confident to provide more extensive support but without crossing the line between that and a personal recommendation. Although work to provide greater clarity would not change the existing regulatory regime it might drive better outcomes for consumers.
Targeted support in more detail
The targeted support proposal is intended to be something quite new in the space of supply and demand for financial support, involving the use of technology and customer data in innovative ways. It is hoped that by harnessing technology, and using customer data effectively, firms will be able to offer high quality services to more customers at affordable cost. It is hoped that targeted support would enable firms to offer more than information or guidance and help to close the gap that currently exists between advice and information or guidance. Unlike advice as per the current model, targeted support would not need a full customer profile and would not be entirely bespoke but instead be based on target markets within which customers with certain characteristics, requirements, and objectives, might fit, i.e. it would not be highly personalised but would be targeted at a band or target market of characteristically similar consumers. The FCA describe the target market as a group of people with the “same high-level needs, characteristics and objectives”, i.e. a generic group of people who are alike based on a limited range of pertinent data and for whom certain products and services are designed and identified as being suitable. This vision of a new kind of financial support would have consumer protection at its core and be surrounded by its own tailored framework of regulatory protections designed to protect consumers from harm and support the requirements of the Consumer Duty by enabling the consumers who make up the target markets to benefit from better outcomes than they might have done had targeted support not been available.
It is envisaged that targeted support might particularly appeal to retail banks, life insurers and platform providers and might enable consumers to make more informed decisions about their investments and pensions, areas where the FCA has identified consumers would welcome more support around complex decisions.
There remains a considerable amount of thinking to do around the development of the concept of targeted support including in relation to: the kind of offerings that could be presented to consumers using this type of support; applicable limitations to the range of products and investments that could be the subject of targeted support; collecting the right level of consumer data and what the sources for that data might be; any wealth or monetary value thresholds; the cost (both to consumers and firms) of providing this support and how that might be met in a way that maximises the reach of the offering into the widest range of consumers taking into account the size of the advice gap that exists; the consumer-facing disclosures that would need to be made in order to ensure that consumers had enough of an understanding of targeted support to be able to decide whether or not it meets their requirements for support; and the regulatory infrastructure that would need to be implemented and developed for the provision of targeted support.
Simplified advice
There have been previous proposals to better support simplified advice propositions (including recent proposals for a new core investment advice regime (about which we have written here)) but no widespread adoption to date. The aim would be to ensure a supply of simpler and cheaper advice to reach an appropriate range of consumers. For firms, there would need to be legal certainty to enable confidence in delivery and commercial viability. Simplified advice would be different to targeted support in that it would enable personalised recommendations designed for the circumstances of individual consumers. However, it would not take account of comprehensive information about the consumer (as holistic advice would) but would look at relevant information about a specific need. It is envisaged that this kind of offering could enable financial advice firms, investment platforms, retail banks and product manufacturers to provide simplified offerings to consumers to address specific one-off needs such as how to invest a lump sum. It is envisaged that complicated decisions (such as pension drawdowns) would be excluded from the scope of the simplified advice regime.
As with the targeted support proposal, the simplified advice proposal also requires further detailed consideration before it could be finalised. In particular, there would need to be consideration of: whether the taking of repeated instances of one-off simplified advice could be permitted; the nature of the information that firms would have to collect from consumers in order to be able to provide simplified advice; the level of legal certainty required by firms and the form that the regulatory framework should take; charges including consideration of charges as a barrier to consumers and how it could be made easier for consumers to pay for simplified advice; the competency framework that would apply to advisers providing only simplified advice; and the appropriate levels of redress and consumer protection in the narrower space of simplified advice.
Conclusions
We will have to wait some time before the results of the current consultation are made public by the FCA. It is widely recognised that more people need access to expert financial support to successfully navigate life’s significant and potentially complex financial decisions and that, for various reasons, not enough people can (or wish to) access holistic, regulated financial advice. It also has to be expected that in order to be able to offer solutions to fill the gap, industry has to be comfortable not just that it can fill the gap without fear of crossing regulatory boundary-lines, but that to make offerings in this space is a commercially attractive and viable proposition.
There are other considerations around whether consumers will derive enough comfort from being informed with generic solutions about what “people like them” might do in “similar circumstances” or their understanding of the limits of one-off specific advice related to one-off specific needs. Consumer education and understanding will therefore be key to assessing whether delivering a step change in the offering is workable. Consumers would need to be able to determine the distinctions between holistic advice, targeted support and simplified advice, and be able to make a judgement about which is the most suitable for them. Consumer choice as to how ultimately to proceed will always leave an unavoidable risk of poor outcomes, but there may also be concerns over the more preventable risks of consumer misunderstanding under any new framework. Could, for example, a consumer always be expected to understand any gap that remained in the information that they held? Could a customer always be expected to have a clear understanding of any factors unique to them and thus making them different to other “people like them”, and still go on to make an appropriately informed decision? If consumers have not been holistically assessed, and no-one apart from them knows all their circumstances, can those consumers always distinguish relevant factors appropriately? There may also be a concern with customers who might appear to identify with a target market but who have unidentified and relevant individual needs and who have incorrectly understood the relevance of those needs.
There are a number of other legal friction points that would need to be resolved, including the interplay between solutions that fill the advice gap and the Consumer Duty, costing possibilities that cut across previously prohibited practices such as cross-subsidisation but which could make these solutions economically workable for industry, customer data collection concerns and the data points that would need to be captured in order to determine target markets, advertising and competition.
In summary, there is a considerable amount of work for the FCA to do to devise a regulatory regime that gives firms the clarity that they would need to open up their offerings into the space currently labelled the advice gap. In addition, there is an amount of work for firms to undertake to position themselves with the technology and the human resources that will be required to service offerings in this space. It remains to be seen whether industry will be sufficiently interested in developing such offerings and whether there is in fact the demand for them, among the consumer community, that is indicated by the regulator. There are signs that several prominent wealth management firms are already being entrepreneurial and positioning themselves to take advantage of current challenges in the market, developments in technology (including AI) and opportunities to push for innovation and development. In the meantime, responses to the specific questions set out in the Review are due by 28 February 2024.
This article was written by Kerry Berchem.