The Financial Conduct Authority (FCA) has launched a consultation paper on proposals for a separate, simplified financial advice regime.
The FCA said the changes will allow firms to provide mass market consumers with straightforward financial needs greater access to simplified advice on investing into mainstream products, specifically within stocks and shares ISAs.
It also added this regime will make it easier for firms to provide advice that is proportionate to the needs of the consumer at a lower cost in a bid to help consumers who are holding large sums in cash to invest, potentially for the first time, into stocks and shares Isas.
The UK regulator said it does not specifically authorise or regulate stocks and shares Isas and does not recommend any specific S&S Isas or investments held in them, however, it views them as “appropriate investment wrappers given their accessibility and cost effectiveness which helps consumers step into the world of investing”.
Proposals
The FCA is proposing the following changes:
- Proportionately reducing the existing qualification requirements to reflect the lower risk of the advice, focused on only the necessary technical and regulatory understanding to advise on mainstream investments;
- Reframing the existing suitability requirements to reflect the narrower scope and complexity of the advice relevant to the decision that consumers will be making;
- Limiting the possible investments that advisers can recommend under the regime to a set of mainstream investments by excluding any recommendations to invest in high risk investments; and
- Allowing greater flexibility in charging structures to allow consumers to pay for transactional advice in instalments.
As part of the regime, the FCA said it will create a new handbook definition of core investment advice, which states advice may only be given on investments into a new stocks and shares Isa, advice may only relate to investments up to the value of the annual Isa subscription limit set by the Treasury and advice may only be given on a sub set of investment products held within a stocks and shares Isa.
Sarah Pritchard, executive director of markets at the FCA, said: “Now more than ever, people across the UK should have access to useful and affordable financial products and services which can improve their quality of life and support the economy. These proposals are part of our work to deliver a consumer investment market where people can readily access support and firms aren’t deterred from providing it.”
The FCA wants feedback on its proposals by 28 February 2023. Subject to the responses received, it aims to publish a final policy statement and finalise rules and guidance in spring 2023 and is targeting implementation of the regime before the end of the 2023/24 financial year, so firms will be able to start offering core investment advice from the beginning of April 2024.
‘Watershed moment’
Richard Wilson, chief executive of Interactive Investor, said: “This is a watershed moment in the UK. It will determine whether we can begin to change the narrative around long-term financial wellbeing. Get it right and the financial services industry can find simple solutions that break down barriers to advice and crucially, reduce the advice gap.
“What we need is simple solutions, with clear pathways that don’t make people feel anxious – solutions that are easy enough that people will actually do it. Financial advice currently centres around complex suitability homework which gets in the way of finding simple, affordable solutions. This is joined up, right way round thinking from the regulator. It’s a big deal.”
Alastair Black, head of industry change at Abrdn, said: “This is a welcome consultation. We need to get behind this and ensure it delivers a practical solution making advice more accessible to more people, ultimately helping to shrink the advice gap.
“Advisers want to be able to offer accessible, affordable advice to match clients’ wide range of needs. And clients don’t always want, or even require, a full review, which can be costly to both deliver and buy. In some cases, clients also want advisers to be able to help their children, who have much simpler, limited needs, but can’t currently get the support they need without going ‘all in’.
“As well as helping more people who need advice access it, it will allow advisers to extend their expertise across generations. This will ultimately engender greater financial resilience and wellbeing across the population and broaden advisers’ client bases.”
Consumer Duty
The FCA has timed the consultation at a point when advisers are currently focused on the incoming Consumer Duty regulations, which come into effect in July 2023.
The Consumer Duty is set to be as impactful as the rules of the Retail Distribution Review (RDR) in 2013, as the regulator assesses firms on four pillars of delivering best outcomes for clients – consumer understanding, products and services, consumer support as well as price and value.
Steven Cameron, pensions director at Aegon, said: “These proposals also need to be assessed through the extra lens of the new Consumer Duty, which receives 36 mentions within the consultation. Any firm considering introducing the new service will want to be absolutely sure it will deliver good outcomes and avoid foreseeable harm.
“With a maximum investment of £20,000 ($24,000, €23,000), the cost of simplified advice whether or not spread, will be a major consideration when assessing value. There is also a big question over how to provide ongoing support for those who through investment growth or year-on-year investments exceed the £20,000 limit, excluding themselves from the new simplified advice service in future.”
The role of guidance
The FCA consultation on the simplified advice regime comes days after treasury committee chair Harriet Baldwin tabled an amendment to the Financial Services and Markets Bill to put ‘personal financial guidance’ into law.
The amendment is looking to tackle the widening advice gap in the UK – and make sure all consumers can have access to financial ‘guidance’ or support.
Tom Selby, head of retirement policy at AJ Bell, added: “If the FCA is able to encourage more people to take good quality advice and invest for the future through this simplified advice initiative, that would be a good thing. However, it is important this isn’t somehow viewed as a one-and-done solution to the advice gap challenge.
“Even if simplified advice takes off, there will be millions of savers and investors who either can’t afford to pay for advice or choose not to take it, or both. Low-cost advice will likely only provide a partial solution for a relatively small subset of the population, with the majority relying on the information and guidance they receive from other sources to make good decisions when it comes to saving and investing.
“It is therefore critical that policymakers are focused on ensuring both the advised and non-advised parts of the market are able to support people as much as possible.
“Lack of clarity over the advice/guidance boundary remains a significant challenge in providing useful information to those who choose not to take advice, and it is important the FCA carries out the promised review of these challenges as soon as possible.
“However, it is possible the government will take charge of the situation. An amendment to the Financial Services and Markets Bill put forward by Harriet Baldwin MP, chair of the treasury committee, could see a new personalised guidance regime created. This has the potential to significantly improve the way guidance is delivered to savers and would likely benefit a much larger group of people than simplified advice.”
Mind the gap
The backdrop of the whole consultation is the widening advice gap in the UK.
More and more Brits face barriers to accessing financial advice during a cost-of-living crisis where IFA services could be life changing.
According to Intelliflo’s 2022 Advisory Business Impact Poll, 73% of advisers believe the gap between those who get financial advice and those who want it actually expanded over the last five years, with more than half describing it as “a lot wider”.
More than six-in-10 (62%) believe it grew even more during the pandemic.
Over half of advisers (58%) have seen an increase in people seeking advice in the last 12 months. But the profile of those reaching out to the advice profession doesn’t seem to have changed, as most advisers (84%) haven’t noticed a shift in the ethnic background, income level (80%), or the number of women (89%) onboarded as clients.
From the adviser perspective, Intelliflo’s poll found that firms feel they are prevented from reaching out to more people that don’t typically access advice because the cost of servicing these clients is too high (46%), lack of time to service more clients (34%) and the added compliance burden (32%).
Though many firms are taking a number of steps to help those who are less likely to take advice.
Over the last 12 months, more than two-fifths (43%) have hired junior advisers to take on some lower income clients, and the same number (43%) have taken on lower income clients as wealth in waiting.
