Vision or intrusion? The future regulation of financial advice
09 March 2020 | Practice Management
Commentary by Richard Withers, head of government relations, Europe
The regulation of financial advice works best when driven by the needs of the people seeking advice. If we imagine how the future is likely to evolve over the next 10 to 20 years, what do those needs look like?
The outlook for a great many individuals and families in the UK is very different to that of their parents or grandparents. They will live longer, and in most cases healthier lives. But they will often lack the financial security provided by either an income-linked state pension or defined benefit (DB) occupational pension.
Instead, those in coming generations that have been fortunate enough to accumulate investments may come into middle age having aggregated a variety of differing pots of capital, including a succession of defined contribution (DC) pension schemes, individual savings accounts (ISAs), general investment accounts, property and business interests. In a family of two working adults this complexity might be doubled. If there are previous relationships to take into account, it might be trebled or quadrupled.
This is clearly a challenging scenario and one that has immense social and political implications. In order to pick their way through such a situation many people would benefit from good professional advice, and it is easy to see how things could go wrong without such advice.
The dilemma for regulators, politicians and the industry is how to maintain the quality of advice while making it more widely available.
Against this backdrop there are several initiatives in play.
In May 2019 the Financial Conduct Authority (FCA) and HM Treasury launched an evaluation of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR). Alongside this, the FCA has been undertaking further work on the role of investment platforms, the suitability of advice, retirement outcomes and pension transfers.
What has RDR achieved?
Many (including the FCA) consider RDR to have been a success. While the FCA's initial 2014 evaluation concluded that the cost of advice had risen, it also found that that professional standards and the quality of advice had improved. With the end of commission-based selling, there was found to be less bias toward products generating high commission payments and fund charges had dropped. Subsequently in 2018 the FCA found that the number of working financial advisers, and the number of advice firms, had risen. This is consistent with Platforum data showing a strong increase in assets under advice, which rose from £64 billion in 2008 to £520 billion in 2018.
However, this is not to say that the FCA considers its job is done. FCA concerns remain as regards the ongoing potential for conflicts of interest between what is good for an adviser and what is right for their client, the continuing existence of examples of poor and confusing communication and the remaining difficulty for clients to understand the costs they are incurring.
What FAMR said
FAMR was an attempt to stimulate greater provision of affordable and accessible financial advice and guidance and close the perceived advice gap. It was recognition that an ageing population, more fragmented employment, higher costs of housing and education, and above all the lack of guaranteed income in retirement, must inevitably lead to more complex financial challenges. But while the need for advice was rising, fewer people were making use of advice, mainly due to cost.
FAMR had a number of positive outcomes, including a deliberate focus by the FCA in facilitating the launch of technology-enabled advice offerings and providing greater clarity for firms as to support that could be provided to clients without constituting regulated advice. In 2018, interim research on the effects of the review found a significant increase in the numbers of people taking advice, an additional 1.3 million. There were also more people seeking guidance and using automated services.
If the increase was encouraging, it does still remain a scratch on the surface. According to a 2017 estimate, although 6% of UK adults were receiving regulated advice, a further 25% would benefit from advice but were not receiving it. Increasing the availability of advice is essential – the limited supply of advice coupled with the increased demand means that in recent years economic forces have taken hold and the price of advice has risen accordingly.
It's not all about RDR and FAMR
The amended and restated EU Markets in Financial Instruments Directive (MiFID II) sought to enhance investor outcomes and has had corresponding implications for compliance, governance and cost models of advisers.
One part of MiFID II that we increasingly hear raised as a challenge is the product governance rules, which are designed to help ensure that investment products meet the needs of identifiable target markets, are sold through appropriate channels and deliver the right outcomes. It is evident that there still remain challenges arising from the voluminous data expected to flow from (and expected back by) large-scale asset managers to much smaller advisory firms, who often do not have the headcount or systems to handle this information as effectively as they would like.
What needs to be done?
The overall development of regulation relevant to financial advisers is going in the right direction in terms of improving investor outcomes while seeking to be conducive to the development of a vibrant and competitive advice market that meets the wants and needs of the investing public.
However, we believe that there are five ways in which the regulatory regime in the UK could be positively developed:
Educate on the importance and value of advice, and what it entails. There is an opportunity for policymakers to help build an educational environment where the value of financial advice is understood and encouraged. More progress needs to be made to improve overall consumer awareness of advisory services and their value.
Increase the supply of advice. The government, industry and regulators must continue to take steps to stimulate the development of a market that delivers affordable and accessible financial advice and guidance to everyone. Although adviser numbers may have stabilised, and in some cases risen, in the post-RDR period, the current limited supply of advice coupled with an increased demand for it means that economic forces have taken hold and the price of advice has further risen1.
Provide further clarity on the boundary between regulated advice and guidance. Despite previous efforts to better clarify the line between regulated advice and guidance and the perimeter of and obligations flowing from ‘simplified advice', the current regulatory framework is still arguably drafted with a traditional advice model in mind, particularly with respect to the definition of a ‘personal recommendation'. This by itself may limit the launch of newer, more innovative advisory solutions. In addition, firms should be able to provide effective and tailored guidance to individuals (as opposed to the more generic guidance which is commonly prevalent now) without worrying about stepping into the area of regulated advice.
Facilitate a sliding scale range of advisory solutions. Further development of a range of investment guidance and advisory solutions would better allow UK consumers to receive the advice they require at a price they are prepared to pay. We believe there is more that regulators can do to catalyse greater innovation in advice offerings in the UK by flexing the information that an adviser is required to obtain to determine whether the specific advice is suitable for the client or not, according to the type of advice that is being offered. Technology is likely to be an increasing key component to successful advice and guidance propositions in the future.
Enable consumers to better compare advice offerings. It is still the case that the majority of consumers do not compare advisers or firms when looking at services and rates being offered. For there to be a fully effective advice and guidance market consumers need to be able to compare services and to shop around advisers. Greater efforts could be made to provide consumers with the necessary tools to be able to deliberate the relative merits of advice providers and the services they offer.
Improvements to date in the quality and transparency of advice services have been positive for clients and the industry.
But there remain opportunities to improve the financial knowledge of consumers so that they prepare themselves for the financial challenges they are likely to confront, particularly in later life, as well as understand why they should seek out financial advice and why it is worth their while to pay for it. To meet rising demand, there is also a need to expand the availability of advice, taking account of different client wants and needs in the way advice is offered.
1 Source: New Model Adviser ‘Advice fees are going up and there is no evidence they will come down' April 2018; also the FCA and HM Treasury FAMR Baseline report June 2017 p22.
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