At first glance, the FCA’s latest consultation looks encouraging. The regime, titled, 'Broadening access to financial advice for mainstream investments' aims to give consumers the confidence to make better decisions with their money - something we can all get on board with.
As things stand, only 8 per cent of the UK population seek regulated advice; an alarming figure. Many have felt priced out of the market since the retail distribution review arrived in 2012.
Despite this, the FCA reckons four million consumers with £10,000 or more of investable assets, mostly or entirely in cash, have an appetite to invest.
Long heralded as the solution to serve this group, robo advice, has struggled to take off. It appears consumers value the human touch after all, hence the emergence of hybrid advice which aims to offer the best of both worlds.
The regulator believes that developing simplified and lower cost advice solutions with a personal recommendation is the answer. But to determine whether its new measures will hit the mark, we need to do a bit more digging.
While promising to make advice more accessible for the masses, could the regime create unintended consequences that will damage both the sector and consumer finances?
Let’s take a closer look, and examine how this could impact advice firms of all shapes and sizes.
It’s part of the FCA’s three-year consumer investment strategy, which was launched last year.
The regulator said the proposals will create a separate, simplified financial advice regime, with the aim of making it cheaper and easier for firms to advise consumers about certain mainstream investments within stocks and shares ISAs. It will enable investors to “access and identify investments that suit their circumstances and attitude to risk," the FCA added.
The FCA’s executive director of markets, Sarah Pritchard, provided further detail:
“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.”
Well, there are four key areas. Let’s analyse whether these proposals stack up for advice firms, and identify any potential problems.
This makes sense, as speeding up the advice process is imperative for firms to offer advice at lower costs.
However, narrowing the client review might give rise to a number of potential risks. Consumers must be made aware of the limitations in place, and understand that focusing solely on their long-term investing goals could compromise other areas such as protection and retirement planning. In some cases, consumers might be better off investing some or all of their savings into a pension.
From what we can see, when the regulator says a limited range of investments, what it really means is just stocks and shares ISAs. As the FCA notes, “Other forms of ISA including innovative finance ISAs, junior ISAs and lifetime ISAs are not included in the core investment advice regime.”
There are a couple of concerns that warrant highlighting.
The restriction to stocks and shares ISAs might exclude those with more than £20,000 to stick away for the long term, creating a group of investors underserved by simplified advice and priced out of traditional models.
Second, younger investors looking to get on the housing ladder may be better served using a Lifetime ISA with at least some of their money. We hope the FCA provides more clarity about the suitability requirements here to avoid the risk of valuable bonuses being forfeited.
The FCA added that core investment advisers will only be required to undertake a minimum of 15 hours continuous professional development (CPD) each year, rather than the standard 35 hours.
Relaxing the qualification requirements indeed sounds sensible, but helping investors to select investments that align with their attitude to risk and capacity for loss is still a delicate area. It’s important that core investment advisers appreciate and understand the broader advice process.
On a positive note, the less stringent qualification requirements may offer a natural path for trainee advisers to gain experience giving advice in simple areas before progressing to holistic offerings down the line.
Given cost is considered one of the main reasons people choose to dodge advice, enabling customers to spread fees over a number of months or years seems logical.
It goes without saying that clear communication here is vital. Consumers must be aware of exactly how much they’ll pay and over what period of time. Plus, if advice fees are being deducted directly from the investment – whether a lump sum or regular – they must understand the potential impact on performance.
As always, the devil will be in the detail. But let’s take stock of what we know so far.
Offering simplified advice for consumers priced out of traditional models sounds great in practice. But as outlined above, there are several sticking points.
The good news is, the FCA has made it clear that offering the service is entirely optional.
Many small-to-medium-sized firms may struggle to see the commercial benefits, and have little appetite to serve customers at the lower end of the market. As several advisers have flagged in the trade press, liability poses a further obstacle.
It may, however, appeal to banks, building societies and some larger advice outfits with the scale and resource to build, launch and maintain a simplified advice proposition.
If adoption is widespread, will this help to narrow the advice gap?
Perhaps. But the only gap this seeks to plug is the harm to savers holding too much in cash.
Advice is desperately needed in other areas, too. Few people have adequate financial protection in the event of death and serious illness, and even fewer are saving enough for retirement. Hopefully after seeing the benefits of personalised investment advice more consumers will be motivated to look at their broader affairs.
While the regime is by no means the perfect solution, hopefully it will lead to more people making better decisions in at least one area of their finances. And that’s progress on what we’ve got right now.
Whether it presents a burden or an opportunity for your firm is something you get to decide.