UK financial advice market review will require 'radical' advice gap solutions, says expert

Out-Law News | 04 Aug 2015 | 11:19 am | 2 min. read

Simpler, more affordable guidance and advice products could be made available to a wider range of financial services customers depending on the outcome of a government-commissioned review.

Charles Roxburgh, director-general of financial services at the UK Treasury and Tracey McDermott, who takes over as interim head of the Financial Conduct Authority (FCA) next month, will co-chair the Financial Advice Market Review (FAMR), which will report back before next year's Budget. The review will examine the 'advice gap' for those with less complex financial needs and will recommend measures to encourage firms to compete on the creation of innovative new products for those consumers.

Harriet Baldwin, economic secretary to the Treasury, said that the UK financial services sector needed to "support working people at every stage of their lives".

"That's why we've launched a major new review to explore what more can be done to make sure consumers can access high quality and affordable advice so they can make informed decisions with their hard-earned money," she said.

However David Heffron, head of financial regulation at Pinsent Masons, the law firm behind Out-Law.com, said that closing the advice gap would require some "quite radical thinking" from the review panel.

"It has been recognised for some time that there is an unmet customer need for financial advice," he said. "This review clearly recognises that need, and it must be welcomed by customers and firms."

"The challenge comes in providing real solutions. The current level of legal and regulatory risk for firms, particularly when considered against what customers feel they should pay, is a significant disincentive to firms in providing advice. Providing firms with an ability to provide advice at an acceptable level of risk/reward will require some quite radical thinking in the current regulatory environment," he said.

The review will examine how the financial advice market could work better for consumers, particularly those who "want to work hard, do the right thing and get on in life but do not have significant wealth". It will focus on consumer financial services and products, including pensions, savings, mortgages, investments and insurance. It will also look more broadly at the provision and effectiveness of advice across retail markets in order to assess whether the different regulatory requirements around advice have unintended effects on consumers and firms.

The government also intends to consult later in the year on how current statutory arrangements governing free and impartial financial guidance, such as that available through the Money Advice Service and Pension Wise, could be made more effective. Those interested in accessing their pensions more flexibly under the 'Freedom and Choice' reforms, which came into force in April, are entitled to free and impartial guidance through the Pension Wise service at the point of retirement, although this service does not offer regulated financial advice.

The review will seek evidence from consumers about the barriers they face when seeking advice, the value that they place on it and how easy it is to understand where advice can be found and what it means, according to the terms of reference. It will consider the current regulatory and legal environment around advice, including the impact that the Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS) have on firms; and whether these issues prevent or discourage firms from offering cheaper advice services.

The review team, which also includes an expert advisory panel to be chaired by Nick Prettejohn of Scottish Widows, will be expected to produce recommendations for reform and a set of principles to govern the operation of financial advice in the UK, according to the terms of reference. They will also consider the impact of European legislation on the UK market, and the need or appropriateness for a 'safe harbour' rule or other regulatory carve-out to limit adviser liabilities.