The Financial Advice Market Review(FAMR), published today, has included recommendations for a further consultation on the definition of 'regulated advice', which could help advisers service a wider client base more effectively.
According to the review, conducted jointly by the Financial Conduct Authority (FCA) and the Treasury, the RDR brought about a "positive step change" in the quality of advice available to those with larger amounts to invest.
"However, steps need to be taken to make the provision of advice and guidance to the mass market more cost-effective."
Proposals include the FCA setting up a dedicated team to help firms developing mass-market automated advice bring these to market more quickly, while HMT should also consult on amending the definition of regulated advice.
'Regulated advice'
A major theme highlighted by stakeholders in their responses to the joint FCA/Treasury consultation was reluctance to "offer other, potentially less expensive, support to consumers in the form of helpful guidance, for fear of straying into the provision of advice".
As a result of these regulatory grey areas, a number of stakeholders have said they have designed their current guidance services to stop a ‘safe distance' short of where they perceive the regulated advice boundary to be.
In response to these concerns, today's paper recommends HMT should consult on amending the definition of regulated advice in the existing Regulated Activities Order (RAO) so it is instead based upon a personal recommendation. This would bring it in line with the EU definition set out in the Markets in Financial Instruments Directive (MiFID).
The definition in article 53 of the RAO is broader and less specific than the definition used in MiFID, which is based upon a firm giving a customer a personal recommendation.
Firms have suggested this proposal will allow them to provide more useful information to support customers, such as the merits and risks of buying and selling particular investments.
For example, firms suggest they would be willing to provide more detailed information in product disclosure documents and on their websites on the
types of customer for whom their range of retirement income products are likely to be appropriate or inappropriate, or provide information on the risk profile of the funds available within their stocks and shares ISA50.
"This could benefit consumers who want or need help to make their own
decisions, and for whom advice might not be the right solution," the report said.
The aim is to implement changes in this area in early 2017, subject to consultation.
Also within this timeframe, the aim is to consult on new guidance to support firms offering services that help consumers making their own investment decisions without a personal recommendation.
"This should include a series of illustrative case studies highlighting the main
considerations firms need to take into account when developing such services and dealing with specific areas of uncertainty identified during the review."
Guidance services
Stakeholders also identified a number of specific areas where they feel a lack of regulatory clarity is inhibiting the development and delivery of aspects of guidance services likely to benefit new and existing customers.
For example, a number of firms would like greater certainty on their ability to write to existing customers with tailored information on their investment, including the use of prompts based on ‘rules of thumb'.
This includes areas such as:
- Contacting existing customers invested in a single asset class or sector to highlight the potential benefits of diversification and prompting them to consider whether their investment strategy is appropriate;
- Contacting existing customers to highlight that a particular investment has consistently underperformed its benchmark and prompting them to consider whether their investment strategy is appropriate;
- Providing new and existing customers with personalised tools and calculators to help inform their decision-making such as a ‘financial health-check'.
- Finally in this area, the review recommends developing a clear framework that gives firms the confidence to provide 'streamlined advice' on simple consumer needs in a proportionate way.
This should include a series of illustrative case studies highlighting the main considerations when developing such models.
Background
The FAMR review was announced last August by HM Treasury and the FCA, which led work alongside an expert advisory panel made up of industry and consumer spokespeople, chaired by Nick Prettejohn, chairman of Scottish Widows.
It was launched in the wake of the government's pension freedom reforms, which allowed all defined contribution savers unfettered access to their savings from age 55.
The government had introduced a free guidance service for those at the point of retirement, but also thought it important for savers to be able to access regulated advice if needed.
Data released in January showed almost half of those opting for income drawdown in retirement between July and September last year did so without seeking advice.
The last comprehensive advice market review, the Retail Distribution Review (RDR) of 2012, banned advisers from charging for their services through commission received by providers.
As an unintended consequence, many advisers moved upmarket, serving wealthier and more profitable clients, while banks withdrew from giving advice almost completely. This created an advice gap for the mass market.
FAMR sought to address the advice gap by exploring how technological solutions could be used to give advice more cost-effectively. The review, which was scheduled to be announced before Wednesday's Budget speech, intended to:
- Examine the 'advice gap' for those people who want to "work hard, do the right thing and get on in life but do not have significant wealth"
- Ensure the regulatory and legislative environment allows and encourages firms to innovate and grow their business models to include affordable and accessible financial advice
- Consider ways to encourage people to seek financial advice, addressing unnecessary barriers that currently deter them.
It examined all types of retail financial products including pensions, savings, mortgages, and insurance. The Treasury said it wanted to make sure people can access high-quality, affordable, tailored advice and guidance to help them make informed financial decisions.
Meanwhile, the FCA is likely to delay its consultation on MiFID II conduct rules for advisers, as the regulator wants to determine the impact of the FAMR first.
