Shocking - FCA impact-evaluation of RDR and FAMR

After some fun in the snow today I settled down to read (at long last) the FCA's Evaluation of the impact of the Retail Distribution Review and the Financial Advice Market Review. For anyone interested in encouraging the masses (not just the affluent HNW) to save and invest it's a must read. Overall it's 65 pages, but the meat is in the first 24 pages, and if you are really short for time there is a 4 page executive summary. Time to throw some snow balls....

A Regulator/Industry Failure or opportunity?

Let’s be blunt…. by most of the FCA’s measures of access, affordability and quality of the range of services, these key pieces of Regulation are a shocking failure. The FCA's survey shows any improvements so far are marginal at best. On the demand side out of 52 mn. adults in the UK the number of consumers getting advice and guidance and using different channels is woeful - only 8% (4.1mn.) had access to financial advice in the last 12 months while 68% (36 mn.) did not receive any advice or guidance at all. Too many hold all or the majority of their money in cash which earns a pittance and is harmful to consumers.

The FCA maintain the view it is the industry’s fault for not developing the services the masses require. Innovation has not yet been able to attract large numbers and the range of services is inadequate. The FCA say firms focus on HNW clients who have at least ￡150k on average to invest and firms face little competitive pressure to innovate and offer more affordable services or to try and attract less wealthy customers. The FCA believes those (8.4 mn adults) with ￡10k or more of investable assets should receive formal support to help their investment decisions. Of those 8.4 mn with ￡10k of investable assets 37% (3 mn) did not have any investments and a further 18% (1.5 mn) were holding more than 75% of their investable assets in cash. They conclude these consumers are missing out on the opportunity of potentially higher return and competition is simply not working effectively in the interests of consumers. So an opportunity awaits!

The FCA think the industry should do more to provide support to mass market consumers, to help them engage with their finances and make better investment decisions. This could include more tailored guidance services, and simpler streamlined advice services. Only 17% (1.4mn) of UK adults with over ￡10k in investable assets took financial advice in the last 12 months. 67% of consumers who had not received financial advice did not think they needed it. The FCA believe the industry should also be doing more to encourage mass market consumers to seek guidance and advice. While the industry has made baby steps there is an enormous consumer education gap which offers a great opportunity but to be frank has not been helped by the FCA’s approach. 

The FCA need to recognise the part they have played in restricting the success of RDR and FAMR and the harm they are doing to 52.4mn UK adults

The FCA profess to having the desire to work with the industry to address these issues but they remain reluctant to admit any responsibility for failing mass market consumers. They simply say “We understand that the current regulatory framework may pose challenges to further market development in sufficiently meeting these consumer needs, and recognise our role in making sure the regulatory issues noted in this report are explored and addressed, where possible.” They suggest they stand ready to work with individual firms on areas such as personalised guidance, which does not constitute regulated financial advice, but only within the current regulatory framework. Tinkering at the edges will not work - to reach 52 mn adults a giant leap is required.

Firms are reluctant to develop guidance services perceived to be at or near the boundary with regulated advice. Why is that? It is because they fear the FCA will use the equivalent of football’s VAR Technology and with the benefit of hindsight declare a foul has been committed. The result is a proverbial Red Card in the form of enormous fines and compensation awards. Why would a firm take such risks to its hard earned reputation?

While some innovative services, such as robo-advice, have been introduced it is on a small scale - only 1.3% of adults have used such services. The FCA Advice Unit have seen 137 applications from firms since 2016 but they have rejected more than half. The failure rate makes it difficult to justify the significant costs involved and you can understand a firm’s reluctance.

The Regulatory Framework is expensive and carries a number of fixed costs. A one-off streamlined advice event is not viable in such circumstances. Onboarding an investor with ￡10,000 to invest is much the same as those with ￡250,000+. The use of technology to reduce the processing costs would be great (and I am looking forward to progress with TISA’s DigitalID project) but the regulatory costs need to be reduced too. Again an opportunity for the FCA.

There are too few financial advisers and financial planners in the UK.

To reach even half the adult population and realise the FCA ambition with regard to consumers, each current financial adviser would need to look after at least 1,000 adults and each firm would need to have over 50,000 clients. To increase competition and the desire to market services to a broader level of investors you need to increase the number of advisers and planners. The heavy regulatory burden (aimed partly at reducing the number of firms the regulator has to supervise) means there are significant barriers to entry and the number of firms and regulated professionals have reduced as existing advisers and planners have retired. There simply is not enough new entrants to the industry. On the one hand quality of advice has improved because of the requirements around qualifications, ethical training and CPD but the business burdens around PII, capital, reporting etc have increased the barriers. The FCA need to think about what can be done to address this shortage of industry professionals.

Low Consumer Demand & Financial Literacy

Finally, addressing the low consumer demand for guidance, streamlined and holistic advice services is a matter not just of innovation, cost transparency, competition rules or regulation but one of a national education programme for UK adults and children. The FCA unfairly compare the UK to the USA/Netherlands/Australia/Switzerland where consumers have more personalised understanding of managing money, investment and the value of advice services. In each of these countries there are better opportunities from an early age through to adults to learn about financial literacy. The FCA should, for example, talk to Rishi Sunak and consider with the Government how they might use the initiative on the re-vamp of FE Colleges to progress a new national education programme for consumers on making their money work better. This includes supporting education around use of digital services, apps with automated advice and maintaining cyber-security. Sounds like another opportunity for the FCA to build on the footings of RDR and FAMR because that is all they have so far - we have a long way to go before the house is built!

The next checkpoint will be in the Summer when the FCA provides an update on feedback from the Consumer Investments Call for Input*. Meanwhile there will be opportunities to get involved in industry events covering this impact assessment and hopefully this gives you some ideas for discussion. Keep safe...and warm!  

? Clive Shelton Chartered FCSI

* https://www.fca.org.uk/publication/call-for-input/consumer-investments-market.pdf