FCA proposes to bridge financial ‘advice gap’ by rethinking advice framework

A new discussion paper (62 pages/787KB) identifies examples of harm caused by this gap, including consumers not investing enough in their pensions or turning to high-risk investments without sufficient understanding.

The FCA wants firms to do more to help consumers make better decisions, particularly in light of the customer information and support outcomes of the consumer duty. However, firms can be reluctant to do so out of concern that they may stray into providing a personal recommendation, opening themselves to claims for failure to comply with suitability requirements.  

Against this background, the proposals in the paper include clarifying the boundary between personal recommendation, advice and general information or guidance. The proposals also clarify the requirements applicable to simplified, one-off advice aimed at addressing a specific investment need and introduce a new framework for “targeted support”, where firms would be able to suggest an investment decision where the consumer falls within the target market of the relevant investment.

Specialist in financial services regulation David Heffron of Pinsent Masons said: “The advice gap is a complex and long-standing issue. We have seen two of the three proposals – clarifying the boundary and simplified advice – put forward by the FCA before in different guises. The third proposal, targeted support, is new and welcome.”

Both simplified advice and targeted support could be based on a more limited set of personal information than that which firms need to collect for full advice. This could go as far as the introduction of new rules to reassure firms as to the minimum set of information enabling firms to comply with the requirement to have a reasonable basis for their advice, although financial regulation expert Juan Jose Manchado of Pinsent Masons said this would “seem at odds with the FCA’s preference for outcomes-based regulation”. However, while simplified advice would still result in a personal recommendation, targeted support would instead result in a suggestion for the consumer to make an investment decision adequate for “people like you”, where “people like you” would be people in the target market that the consumer receiving the suggestion belongs to.

Among the potential scenarios where targeted support could be used, the paper mentions advising a consumer with a long-term horizon, but who is mostly exposed to fixed income, to invest in a fund that is better aligned with the needs, objectives and characteristics of the consumer. Firms would be allowed to base their suggestions on limited data points, but the suggestion would need to be likely to provide a better outcome for the consumer that if the consumer had not received it.

On this, Manchado said: “It appears that HM Treasury and the FCA will consider amending the perimeter to accommodate their targeted support proposals. Suggesting to a client that an investment idea is aligned with the needs, characteristics and objectives of ‘people like you’ does feel like an implicit personal recommendation. Whilst in the context of pensions’ decumulation pathways and non-workplace defaults firms may be reassured by the fact that they are obliged by regulation to present those investments to clients, they may be slower to embrace targeted support proposals if not accompanied by changes to primary legislation, or a bespoke set of conduct regulations.”

“It will also be interesting to see whether any additional certainty or flexibility as to the type of information that firms need to obtain from clients may help automated advice to take hold. This is notwithstanding the research, cited in the discussion paper, showing that consumers still prefer an element of human interaction in the advice process - it appears that research was conducted before the emergence of AI into public consciousness late last year,” he added.

In the paper, the Treasury and the FCA recognise that the targeted support proposals are a fundamental rethink of the way support is delivered to consumers. They are also open to the possibility of allowing firms that offer targeted support to not charge an explicit fee to consumers receiving the advice, and instead cross-subsidise the cost from other business areas. This would include a cross-subsidy, but not a commission, from the manufacturer of the investment to which the targeted support suggestion relates. HM Treasury and the FCA will consider the competition implications of this element of the proposal.

Heffron added: “Whilst the proposals are to be welcomed, they are at a very early stage. The outcome needs to work for consumers and firms and there are a wide range of stakeholders from whom input will be needed. Whilst movements in interest rates and financial markets – in different directions – may have mitigated in the short term some of the detriment consumers experience in not investing, the advice gap is a real-world problem that needs a solution. We can only hope that this review can progress to a meaningful outcome quickly.”