Out-Law News | 08 Dec 2022 | 9:55 am | 2 min. read
The UK’s Financial Conduct Authority (FCA) has proposed ways to make financial advice more accessible and cheaper for consumers interested in investing in certain mainstream investments.
While welcoming the proposals in the longer term, a legal expert questions the rapidity of take-up of the new regime by consumers in light of the current economic circumstances.
The FCA has set out its plan to create a separate and simplified financial advice regime, with the aim of making it cheaper for consumers and easier for firms to advise and provide support services to consumers about investing in certain mainstream investments to hold specifically in a stocks and shares individual savings account (S&S ISA) wrapper.
The proposals have been made following the regulatory body’s recent Financial Lives survey, which found around 4.2 million people in the UK hold more than £10,000 in investable assets mostly or entirely cash and are open to investing some of it. The FCA warned that consumers who hold a significant amount of excess cash may be damaging their financial position, as inflation reduces the real value of their savings.
The proposed new regime is part of the regulator’s consumer investment strategy and its effort to help the financial advice market support mass market consumers with what the FCA describes as “straightforward financial needs” invest in mainstream products in S&S ISAs. It recognises that if financial advice is too costly for many potential investors, they could be prevented from investing when it may be in their interest to do so. The changes are also set to address the challenges firms may face in providing advice to consumers with simpler needs and lower investment amounts, and who as a result often pay lower fees where the fees are calculated on the basis of a percentage of the amount invested and so firms may not serve such less affluent consumers.
“This initiative is to be welcomed in the longer term to encourage potential investors out of cash and into relatively safe investments. However, it is questionable the extent to which it will be used in the near future in light of current economic circumstances,” said Elizabeth Budd, financial services expert at Pinsent Masons.
“The target market investor needs to have 3-6 months’ outgoings in liquid savings – a diminishing group with the cost-of-living crisis - and have up to the S&S ISA limit, currently £20,000, to invest in a stocks and shares ISA without also wanting a more holistic advice service covering things like life insurance and pensions. It is worth remembering that many individuals fall outside pension auto-enrolment and have inadequate pension savings,” she explained.
According to the FCA’s consultation paper (117-page / 1.29MB PDF), it proposes to streamline certain regulatory requirements in retained EU law and in the FCA Handbook. The main changes include reducing the level of qualification needed to reflect the lower risk of this narrow scope advice; reframing the existing suitability requirements to reflect the narrower scope and complexity of this advice relevant to the decision that consumers will be making; limiting the possible investments advisers can recommend under the new regime to a set of mainstream investments by excluding any recommendations to invest in high-risk investments; and allowing greater flexibility in charging structures to allow consumers to pay for transactional advice in instalments.
The consultation paper provides evidence of historic investments over the past 10 years (2012-2021), which shows that investing in a range of different general strategies generated far greater returns to holding money in cash – especially when factoring in inflation.
However, Budd said: “The figures given for growth over the last 10 years in the consultation paper of different investment strategies versus cash shows a negative return on cash, but these need to be reconsidered against the backdrop of higher interest rates and a volatile market along with the impact of the fees charged for an investment strategy”.
The FCA is seeking comments on the consultation paper by 28 February 2023 and plans to publish a final policy statement and finalise rules and guidance in spring 2023. The implementation of the new regime is expected to be before the end of March 2024, so firms will be able to start offering core investment advice from the beginning of April 2024.
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