This has been a question that the financial services industry has been struggling with over the years. What is the difference between advice and guidance? Where does one cross into the other? Do consumers understand the difference? Where do we need to go for one or the other? Does anybody care?
In December 2023, the FCA produced a policy paper DP23/6 covering “Advice Guidance Boundary Review.
Individuals have more choice than ever about how to save and invest their money. Developments in technology have facilitated greater consumer access to information and ability to exercise control over their investments. Meanwhile, pension freedoms have given individuals the flexibility to manage their financial futures in a way that works best for their personal circumstances and goals. However, the FCA knows that a majority of people are not accessing traditional channels of support such as regulated financial advice to help them make financial decisions. This means that the provision of financial advice is often out of reach for all but the already wealthy. I want to change this and ensure that a much broader range of consumers are empowered to proactively manage their finances.
This review builds on previous Government and FCA work to improve support for consumers. The Retail Distribution Review and Financial Advice Market Review enhanced the quality of financial advice and provided greater certainty for firms. While these have been welcome steps, there is still a long way to go to address this issue and ensure that consumers can access support that works for them. Everyone should have access to financial advice.
The overall picture is that consumers can find it difficult identifying that they need support and when they do, their needs are not being fully met.
The overall picture is that consumers can find it difficult identifying that they need support and when they do, their needs are not being fully met. While not everyone will want or need support, many consumers could be missing out on the value support can provide – a situation commonly known as the ‘advice gap’.
8 In practice there is not a single advice gap representing one problem, but multiple gaps covering overlapping problems. There are various drivers that may lead to the advice gap.
- A consumer wants advice but may be unwilling to pay for it or might be reluctant to pay for professional advice without being confident about its quality or value.
- A consumer wants advice but may be unable to afford it.
- A consumer who has never invested before may need support to make an investment decision but is unsure where to start.
- Firms want to warn a retail customer of potential harms but may perceive that they would need to give advice to do so.
In 2021, the FCA set out its vision, under its Consumer Investments Strategy, to develop a consumer investments market in which consumers can invest with confidence, understanding the risks they are taking and the regulatory protections offered.
The FCA is mindful there is a lot of regulatory reform that could impact on or inform this review. There have been relevant initiatives that are likely to interact with this review.
- Smarter Regulatory Framework (SRF): The Financial Services and Markets Act 2023 repeals retained EU law for financial services. The Government intends to deliver a SRF for financial services which is tailored to the UK.
- ISA simplification: At Autumn Statement 2023, the Government announced changes to simplify ISAs and provide more choice, meaning it will be easier for people to choose the best ISA accounts for their needs and move money between them. This involves digitalising the ISA reporting system to make it more effective.
- Compensation Framework Review (CFR): The FCA wants to ensure that the compensation framework continues to provide appropriate consumer protection with costs distributed across industry levy payers in a fair and sustainable way, while making sure the regime is proportionate and drives the right consumer behaviour.
- Disclosure Reform: As part of SRF, the Government will repeal the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation and the FCA will be designing a new disclosure framework.
- Pensions dashboards: The FCA, working with other Government and regulatory partners, is keen to see a pensions system that provides good products, supports consumer decision-making and ensures strong confidence in pensions.
- Pension engagement trials: The FCA is working with industry to run field trials to explore effective touchpoints for engaging consumers with their pension.
- Retirement Income Advice Review: The FCA’s thematic review of the market is currently in progress. This discovery work is exploring how advisers are delivering initial and ongoing advice on retirement income and whether this is leading to good outcomes for consumers.
- ‘Helping savers understand their pension choices’ consultation: The Department for Work and Pensions (DWP) has recently published their consultation response on proposals relating to the support and products to be made available to members of occupational pension schemes when they access their pensions.
Section 149 of the Equality Act 2010 requires the Government and the FCA to have due regard to the need to eliminate discrimination, advance equality of opportunity and foster good relations between different people when carrying out their activities.
However, an analysis of the FCA’s latest Financial Lives survey (FLS)
2022 Consumer Investments Report and Pensions (accumulation and decumulation) report highlighted that:
- Women were less likely than men to:
- hold any form of investment (34% vs 50%)
- have received financial advice in the last 12 months (7% vs 10%)
- be highly engaged with their DC pension (17% vs 32%)
- agree that they are confident in their own abilities to find financial products and services that are right for them (61% vs 72%)
- People from a minority ethnic background were less likely than people from a non- minority ethnic background to:
- hold any form of investment (39% vs 42%)
- have received financial advice in the last 12 months (4% vs 9%)
- be highly engaged with their DC pension (21% vs 26%)
The FCA’s evaluation of the impact of RDR and FAMR found that most people are comfortable making less complex financial decisions themselves, such as taking out a cash ISA, without getting advice or more specific support. But for decisions consumers see as more complex, such as deciding to invest in a stocks and shares ISA (S&S ISA), most would value some support. Unsurprisingly, the evaluation found that, as the level of complexity inherent in the financial decision increases, the perceived need for support among consumers also increases.
Lack of appropriate support may be leading consumers to make decisions which are not in their best interests. These include:
- Consumers do not understand or are disengaged with their pensions making them unprepared for retirement.
- Consumers holding savings in cash, who are at risk of having the purchasing power of their money eroded over time by inflation.
- Consumers are not investing enough in their pensions to meet their financial goals.
- Consumers are making uninformed decisions when accessing their pension savings.
- Consumers are turning to high-risk investments, including speculative investments, without a sufficient understanding of the risks.
- Consumers risk getting ‘advice’ from unregulated sources often through social media.
The UK market for financial support services focuses either on giving holistic advice or factual information and guidance.
- Holistic advice: This is a regulated activity. A firm wishing to give holistic advice would need to be or become FCA authorised, obtain the regulatory permission to undertake the regulated activity of advising on investments and meet the requirements for firms undertaking this activity. Holistic advice is where an adviser considers a consumer’s overall financial circumstances and objectives before making recommendations to meet their objectives.
- Information and guidance: Consumers use a broad range of information and guidance from not-for-profit, public-sector providers and the commercial sector to help them make financial decisions. These services do not make a personal recommendation. Instead, they typically give generic, factual information.
Proposals to close the gap.
Further clarifying the boundary (proposal 1): This would provide FCA-authorised firms with greater certainty that they can give more support to consumers without providing a personal recommendation under the existing framework.
Targeted support (proposal 2): This option would rethink the way that financial support is delivered to consumers.
Simplified advice (proposal 3): In November 2022, the FCA set out proposals for a simplified advice regime ‘Broadening access to financial advice for mainstream investments’ (CP22/24). It aimed to provide straightforward, one-off investment advice to consumers with less complex needs.
The FCA wants to ensure that targeted support is widely accessible to the mass market and so benefits the widest range of consumers. To achieve this, the FCA want to establish a new standard which has a proportionate approach to gathering more limited customer information, consistent with ensuring the support is appropriate to a broader target.
We do need the Consumer Duty, after all!
