Missing, presumed lost. Where is the support for customers?

We are expecting the publication of a Discussion Paper, exploring, once again, how we might reform the regulatory boundary between advice and guidance. Before it lands, it is important to understand what the difference is between regulatory treatment of advice and guidance, what the concerns are that have led to this,?and what the review should seek to achieve. I’ve set out a few thoughts on these points below.

What is regulatory difference between advice and guidance?

The ‘advice-guidance’ boundary has arisen from a simple concept; if a regulated person or firm recommends that their customer does something, that something should be the right thing (‘suitable’) for said customer. Advice in this context is drawn widely to capture any time a firm directly points their customer to a specific recommendation for action and must be based on an understanding of something specific about them. The Regulations introduced following the Retail Distribution Review (RDR) added to this suitability requirement with requirements for individuals providing advice to hold a minimum qualification and removing the ability of the cost of the advice to be included within the product charge, commission was banned.

The advice-guidance boundary refers to the fact that information can be given to a customer without these protections as guidance. But, once a recommendation or advice is given these regulations apply and the firm has crossed the advice-guidance boundary.

What are the concerns?

We often hear reference to an ‘advice gap’. That is, people who could benefit from advice who are unable to get it because the market does not provide a service that meets their needs, in a way that is attractive and or affordable. Gaps such as this are common in all markets, but the challenge here is whether the advice gap is made worse as a direct result of too much and unnecessary regulation.

Regulators have tried to support firms with additional guidance and clarifications about what is possible within the current regulation. But there remains uncertainty over what you need to know to determine suitability and how the Financial Ombudsman Service would interpret any case in practice – when have you asked enough to determine whether a recommendation is suitable? And this leads to caution from firms, which results in less advice being given. This is not only a poor outcome for customers but also increases the cost of advice to those who need it. It is also questionable whether applying the RDR rules on charging to all advice may also be having a chilling effect on the range of services firms choose to provide. Customers are often unlikely to be willing to pay for ongoing support that outside of financial services would be provided for free.

What should the review look to achieve?

While there are good reasons to review the current advice-guidance boundary, this is not the moment to throw away all of the changes introduced following the RDR. Several reviews from the FCA have shown real improvements for consumers. Equally, if a regulated firm makes a recommendation, shouldn’t the customer reasonably expect it to be suitable for them? New tech solutions continue to emerge that reduce the cost and increase the availability of support. Part of the problem is also undoubtedly driven by consumers failing to recognise a need for support and/or being willing to ask or pay for support.

Despite this, the review should consider whether the advice-guidance boundary, and regulations enforcing it, have led to a lack of flexibility in the market. More can still be done to help people get the support they need. The lack of definition around suitability has created a market where many of the firms that consumers know and trust are reluctant to offer any service narrower than the full holistic advice offered by most financial advisers. The need to charge for any support, which finds itself defined in regulation as advice, puts consumers off seeking support and firms off providing the support, knowing that customers wouldn’t buy it.

While still having some of the flaws of the existing advice-guidance boundary, the current FCA Consultation seeking views on a new Core Investment Advice provides the seeds of a new regulatory settlement.?Greater definition allowing firms to target a simpler service, with greater certainty over what they need to know could be a model for other services. Liability linked to a clearer idea about the information needed to make an assessment strikes a balance between the rights of the individual and the desire of firms to offer affordable services. Are there parallels to support people to make better choices in pension savings? What about support for at-retirement decisions?

The review may need to be slightly more radical when looking at the world of nudges and support for existing customers. Many aren’t receiving advice at all, but simple nudges given by their provider could significantly improve outcomes. What about the customers in older, higher charging funds who could benefit from being pointed to a more modern, almost identical, but cheaper fund?

When it arrives, firms should engage with the Discussion Paper. This could be a generational chance to shake up the market, improve outcomes for customers and make a more attractive market for firms to enter and compete with a wider range of services. There are plenty of ideas in the market and firms are already talking about the need for reform. I’m looking forward to the?debate.