At a Glance
The FCA recently published its evaluation of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR). These Reviews brought about major changes to the distribution of retail investment products and the provision of financial advice. The FCA’s evaluation of these Reviews is designed to assess their effectiveness in improving the standards and accessibility of financial advice and guidance in the UK.
Overall, the FCA judges that the “the advice market is moving in the right direction, albeit slowly” and its evaluation does not contain any proposals for major reform or revision to the market. However, based on its findings and the work it has undertaken in other sectors, we think that, in the wake of this evaluation, the FCA is likely to:
- Scrutinise more closely the value for money being provided in the financial advice market, particularly in relation to ongoing advice services; and
- Pursue any necessary clarifications to the boundary between guidance and advice, recognising the current “advice gap”, the challenge for smaller pension pots of bearing full advice costs, and firms’ concerns about a lack of clarity as to the point at which generalised forms of consumer support and guidance can be deemed to be regulated advice. The FCA has not, however, confirmed its intentions here, so whilst substantive rule changes are a possibility here, the FCA may yet opt to give firms further guidance on the application of the existing regime.
The FCA says that it will supplement the evidence from its evaluation with feedback to its Call for Input on Consumer Investments, to inform its next steps. The FCA expects to carry out this work during the first half of next year and will provide a further update at that point.
- The evaluation notes the following improvements in the market since the conclusion of FAMR:
- Approximately 4.1m UK adults have received financial advice, an increase from 3.1m in 2017.
- Adviser numbers are up from 35,000 in 2012 to 36,400 in 2019.
- The creation of the FCA’s Advice Unit has helped firms to develop new automated advice models (it has received 137 applications for support, with 65 accepted).
- Estimated assets under automated advice services increased from £0.4bn in 2016 to £3.2bn in 2019.
- Consumer awareness of automated advice has increased, with 19% of consumers reporting having heard of these services (compared to 10% in 2017).
Despite the FCA introducing its Advice Unit to bring more automated advice services to market, the growth in automated advice has been slow.
The FCA notes that retail banks have started to enter the automated advice market and it expects that “all the major retail banks will have an automated advice proposition within the next few years”. Given the retail banks’ size, scale and established consumer base, the FCA thinks this development has the potential to increase substantially the number of consumers using automated advice services in the years ahead. Open Finance is also flagged as a possible catalyst for helping to bring more automated advice propositions to market.
The FCA flags a number of concerns about holistic advice, which is where an adviser considers a consumer’s overall financial circumstances and objectives and makes recommendations to meet them. Such advice constitutes up to 95% of the overall advice market.
The FCA observes that consumers are generally satisfied with the holistic advice services they receive and think they deliver value for money. However, the FCA found that consumers tend to have a poor understanding of the charges they pay, both for any initial advice and for ongoing advisory services. It is also concerned about the numbers of new customers being placed into ongoing advisory arrangements and suggests that “some customers might be paying for a service they do not need.” It also notes that, once consumers have chosen a financial advisor, they tend to be loyal and are not price sensitive.
The FCA expresses concern that firms do not compete on price and that “consumer perception of value may not always be accurate and they are not exerting competitive pressure on adviser charges.”
Implications and Next steps
Value for money
Over the past few years, the FCA has carried out several major pieces of work focusing on the value for money of major retail financial markets. Given its conclusions about the value provided by the holistic financial advice market, it seems likely that financial advice could well be the next major market to be considered as part of the FCA’s value for money agenda.
Ahead of any detailed supervisory scrutiny of value for money in the financial advice market, firms should be alert to some of the specific issues raised by the FCA’s evaluation and consider the following actions:
- The FCA is concerned that customers are placed in ongoing advice arrangements by default, rather than through a positive decision by consumers based on their circumstances. Accordingly, firms should consider reviewing customer take-on procedures to ensure that, where customers being signed up to ongoing services, this has been done demonstrably with the customer’s knowledge and on the basis of their circumstances.
- The FCA’s analysis of charges for ongoing services indicates that those with a 1.0% annual adviser charge did not offer noticeably different features from those charging 0.5% annually. This was also the case for one-off advice, where those services charging 3% did not involve noticeably different features from those charging 2% or less. We expect the FCA will be highly sceptical of, and hence will scrutinise, instances where customers are charged at the upper end of the market range, without this being demonstrably justified by quality or features.
- In both contexts, firms may want to refer to our recent paper, entitled Good Value. This sets out a comprehensive economic framework that firms across all financial services sectors can use to assess and demonstrate the value for money of their products and services.
Personalised guidance and streamlined advice
The FCA has identified two services which, though not widely available or widely used, could help customers make financial decisions. These are:
- Personalised guidance - this is guidance that is more personalised to the specific needs of a customer, but which does not amount to regulated financial advice; and
- Streamlined advice - (also known as focused or simplified advice) provides a personal recommendation limited to one or more of a customer’s needs.
Some firms have raised concerns about a lack of clarity around the point at which more general forms of consumer support (e.g. guidance) become regulated advice. This has led to some reluctance to offer potentially less expensive support to consumers in the form of guidance, for fear of straying into the provision of regulated advice. The FCA and HMT have previously attempted to address this issue through guidance for firms and changes to the Regulated Activities Order (RAO). However, it acknowledges that “some concerns remain and that some firms are still finding it difficult to develop new services to meet the needs of consumers.”
The FCA says that its next steps, taking account of feedback its receives on its Consumer Investments Call for Input, will look at “how we can help more firms within the existing regulatory framework, using the existing support network such as the FCA Advice Unit; and considering whether existing rules can be changed to facilitate innovation that benefits consumers.” This suggests that the FCA may be willing to consider rules changes to help facilitate these new forms of advice and guidance coming to the market, although it has not yet clarified what this may look like in practice.
However, as we noted in our previous advice related blog, unless the FCA is willing to broaden its view on what constitutes guidance, the costs to firms of providing a fully regulated service, when combined with customers’ willingness to pay only very low fees, means that automation of basic advice services will continue to be commercially challenging.