Speech by Therese Chambers, our Director of Consumer Investments, delivered at the TISA Financial Advice and Guidance Conference in London.
Speaker: Therese Chambers, Director of Consumer Investments, FCA
Event: TISA Financial Advice and Guidance Conference in London
Delivered: 21 March 2023
Note: this is the speech as drafted and may differ from delivered version
Highlights
- The FCA wants to ensure we have a healthy and successful consumer investment sector in which firms can thrive and consumers can make informed choices about financial products and services.
- We are committed to a regulatory approach that supports streamlined advice models. Following the closure of our consultation on our core investment advice regime (CP22/24), we are considering the best way to take forward any simplified advice regime as well as the timeline for doing so.
- We, alongside the Treasury, are keen to ensure that the advice guidance boundary review is genuinely holistic. It is imperative we get the review right – something that will inevitably take time.
Background to advice and guidance
Let me start by reiterating our commitment to a consumer investment market that works well, as set out in our Consumer Investment Strategy[1].
This conference is therefore a great opportunity to speak to and hear from industry today on our next steps to making the UK financial services industry the best it can be.
We want to build a retail investment market which consumers can trust, and which is sustainable for firms, recognising that the complexity that consumers face in making financial decisions has never been higher and their need for help has never been greater.
We have already made significant progress over the last decade through reforms implemented as part of the Retail Distribution Review (RDR).
To name a few highlights:
- The removal of commission to reduce product bias from recommendations.
- Better and clearer disclosure enabling consumers to make more informed choices.
- A qualifications pathway that ensures minimum levels of technical knowledge and has elevated financial advisers to a recognised professional role.
While it’s right to acknowledge the positive impacts of RDR, it is important that we are honest about the state of the sector. So, I want to set out where it could, and should, be performing better.
I also today want to use this opportunity to re-confirm our commitment to ensuring that the regulatory burden on firms is proportionate, so that firms can do more to help consumers, particularly those most vulnerable.
This will also help improve one issue highlighted in our Consumer Investment Strategy, that many consumers face barriers to accessing financial advice, particularly those with fewer assets.
As we consider the feedback to our recent consultation on core advice and the forthcoming Advice/Guidance Boundary review, our vision for the future of the financial advice market is to ensure that consumers receive the help they need at a price that they can afford. This is a pertinent issue given that our Financial Lives 2022 survey[2] research shows at May 2022 that just 27% of non-retired adults have given a great deal of thought to how they will manage financially in retirement (with 33% not having thought about it at all).
For this vision to become reality we need to devise a new regime which works for consumers, first and foremost, but also works for firms from a commercial perspective and for the regulator so that we can assure ourselves that the market is working well.
CP22/24 on core investment advice
This brings me neatly onto my first topic, our work to deliver a new core investment advice regime.
We want to see a consumer investment market in which consumers can invest with confidence, understand the risks they are taking, and the regulatory protections provided.
And key to this is ensuring that consumers can get the advice or support they need.
Indeed, approximately 9.7 million adults in the UK[2] who have £10,000 or more investable assets hold the majority (75%+) or all in cash, an increase of 1.3 million since 2020. Considering the current economic situation this may change further.
For some people holding funds in cash will be the thing to do, but for many it will not, and they are likely to be losing out on the real value of their investments over the longer-term.
We believe there is a strong appetite for a market for cheaper and more simplified financial advice to help these consumers.
This is why in November last year we published a Consultation Paper[3] on broadening access to financial advice for mainstream investments.
Our proposals seek to remedy this issue, by making it easier and cheaper for firms to provide streamlined advice for consumers investing in mainstream investments via a Stocks and Shares ISA wrapper.
Recognising the narrower scope of advising on investments into a Stocks and Shares ISA, we were keen to apply a pragmatic and proportionate regulatory approach to this.
I want to be clear that the purpose of this work is not to encourage consumers to invest at all costs. Rather it is to facilitate a market where firms can better support consumers with simpler needs and enable them to make effective decisions on whether and how to invest or not.
Feedback on CP22/24
Before I dive into the feedback, I want to start by thanking you for your time to consider and respond to us on the consultation. We’re committed to working closely with industry to get this right. The responses that we had were thoughtful and constructive.
Our consultation responses reveal that firms are keen to do more in this area. Also, that firms support the premise of a core investment advice regime, and this will work for many business models.
However, we do recognise from some of this feedback that core investment advice, may not work for your business in the form that the proposals are currently in.
We recognise the need to offer as much regulatory clarity for firms as possible and understand some of the concerns that have been raised considering the limitations of the target market definition; as is defined by core investment advice.
We also appreciate the significant piece of work that will be coming down the tracks in respect to the advice and guidance boundary review. I will touch on this next.
We also understand that some of you will want to see the outputs from this review before committing to implementing this new simplified regime.
I want to now reiterate my commitment to a regulatory approach that supports streamlined advice models, and we recognise the importance of this in helping to resolve the Advice Gap. We are therefore considering the best way to take forward any simplified advice regime as well as the timeline for doing so.
We will communicate our next steps on this with you soon.
Advice / guidance boundary review
The second piece of work that I wanted to talk about today is our holistic review of the boundary between advice and guidance.
As was announced last year, the FCA and the Treasury will jointly be carrying out a holistic review of the boundary between advice and guidance. The Chancellor also committed to the review as part of the Edinburgh Reforms in December.
The purpose of the review is for us to gather a detailed understanding of how the boundary is operating and its impact on consumers, which will inform any necessary changes going forward.
We want to ensure that we apply appropriate levels of protection to consumers. However, we do recognise that in some cases the regulatory regime is too burdensome and that can conversely act as a barrier to firms delivering services to consumers that they want and need.
I want to assure you that I am committed to reducing the burden of regulation, where it is proportionate and practical to do so, if this allows for better consumer outcomes to be achieved.
Scope of the advice / guidance boundary review
Turning to the scope of this review, we have been actively considering the scope of and approach to the review since the start of the year, both by us and the Treasury.
Recognising the significance of this work, we are keen to ensure that the Review is genuinely holistic, and we will be considering the review from the starting point of a ‘blank canvas’
This review should work for the group that these products and services are intended for: consumers. It is imperative that this review delivers what consumers want and has consumer support. As such I want to reiterate that the ‘consumer voice’ is at the forefront of our thinking.
We also recognise the need to have greater clarity on the remit in which firms are operating and to give greater regulatory certainty for firms to give the support consumers need to make decisions. Also, that these regulatory requirements are balanced and proportionate.
As such I can today confirm that accumulation products (including GIAs, ISAs and Pensions wrappers) will be within the scope of this review.
We have also taken on board the issues that firms operating in the Pensions Decumulation space have raised on providing proportionate guidance to consumers. And I can announce that we will also be including decumulating assets, including pensions decumulation, within the scope of the review.
However, recognising our regulatory standpoint that a firm should start by assuming that a transfer out of a pension scheme with safeguarded benefits will not be suitable; I can confirm that Defined Benefit transfer advice, even below the £30,000 threshold for advice, will be excluded from this review.
Additionally, any other pensions that have safeguarded benefits such as Guaranteed Minimum Pension or a Guaranteed Annuity Rate will also be excluded from the scope of this review.
Having an effective framework that has the trust and confidence of consumers, that can work for everyone, will be in everyone’s interest.
Timings for advice / guidance boundary review
Touching now on timescales for the review, we recognise the significance of this work. This will be a substantial piece of work; therefore, it is imperative that we get this right. And this will inevitably take time.
Together with the Treasury, we are also considering how to organise our engagement with industry as part of this review, beyond the usual engagement we both have with industry to hear all your views and take these into consideration as we shape the Review
We are also working to bring forward opportunities for more formal input setting out the options that we may be considering and seeking views on the range of issues at play. We will share details and timings on this in due course.
Finally, I recognise that there are also some options that have been publicly suggested on the method to help resolve some of these issues and I wanted to use this opportunity to reiterate our thanks for the dedication, time and work undertaken on these.
We recognise the detail and effort that has been put into some of these, especially the Personalised Financial Guidance proposal put together by this membership. I would like to reiterate that the starting point for this review is very much a ‘blank canvas’ and we will be paying close attention to all input received to date.
This means there are a range of potential options in play and in the process of being considered to address the advice gap.
Future Disclosure Framework
Now I want to move onto touch upon one of the key and pertinent aspects to our regulatory approach, which is on disclosure.
We are now living in a more digitally enabled world and as result the way that consumers buy and sell investments has changed.
This means that rules that were put together in a time of paper-based disclosure may not be appropriate for the current digitally enabled methods of distribution.
Having an effective disclosure regime, ties into the objectives that we are seeking: to create a retail investment market works for all.
To reflect the constantly evolving landscape, within our recent Discussion Paper[4] we have invited industry’s views on:
- the delivery of retail disclosure
- the presentation of retail disclosure
- the content of retail disclosure
The Consumer Duty[5], and its emphasis on outcomes-based regulation, will inevitably allow us to be more innovative in this space and reduce our reliance on ‘one-size’ fits all approach to disclosure rules.
We recognise in the meantime that this is a pressing issue for many of you and aligns with our objectives, as set out in the Consumer Duty: to make disclosure simpler and clearer for firms and consumers.
We are currently in the process of evaluating responses to the Discussion Paper and aim to feedback on this in due course. We have seen positive responses towards a principles-based approach and establishing flexibility to allow firms to effectively communicate disclosure to consumers. The high level of engagement to this discussion paper represents the appetite for change amongst industry as well as consumer groups to ensure that disclosure is meeting the changing needs of retail investors.
The Consumer Duty
I wanted to touch upon the foundation underpinning all our work in the sector: the Consumer Duty. The Duty represents a watershed moment in our approach to the regulation of retail financial services and, as such, we will be looking for fundamental changes in how firms think about, and treat, their customers. We have further added a new consumer section to our website today.
We have seen good progress from firms in implementing the Consumer Duty and have issued a range of materials on our website to help firms understand what this means for their business.
We have heard that some firms are nervous about providing support to their customers once they are in possession of personal information, as any support could then be seen as a personal recommendation, and therefore regulated advice.
We think there is more that firms could be doing now within the existing framework. Additionally, considering some elements to the Duty, consumer outcomes may not be most effectively supported by firms taking a conservative approach to managing risks from the boundary.
Under the current regime firms can provide information to their customers to enable them to understand their options and the risks and consequences of any decision. So, for example, firms can explain consequences of decisions which may result in a significant tax liability or options available to customers for taking an annuity so consumers can, for example, consider whether they want a single life policy or a joint life policy which continues to pay out to the customer’s partner.
We would already expect firms to be supporting customers in this way, but the Consumer Duty’s focus on good outcomes, including avoiding foreseeable harm, emphasises this.
I recognise this only goes so far to get the best outcome for customers as they are still left to make their own decisions.
I look forward to this discussion continuing as we progress with Consumer Duty implementation as well as the work on the Advice / Guidance boundary.
Regulatory Sandbox
Whilst the advice / guidance boundary review is ongoing, I wanted to signpost you to the role that the Regulatory Sandbox[6] can play in supporting you and your business.
This can allow firms to test innovative propositions on Personalised Guidance and I would like today to share a little more around this with you.
The Regulatory Sandbox is an example of our commitment to financial innovation.
It was set up in 2016 and since its inception it has helped many participants to test products and services in a controlled environment. Some of you may already have applications in the Sandbox or have had previous discussions with our Sandbox teams.
We welcome applications from firms of all sizes and varying stages of development, including start-ups and incumbent firms.
Each participant entering the Sandbox will have a dedicated case manager to provide support in the development and implementation of a test.
Additionally, our Innovation pathways route can provide invaluable support for firms to help understand the FCA regulatory regime and how this can be applied to their business models.
Furthermore, our Digital Sandbox[7] also offers an online platform where firms can access data sets to test and build prototype solutions.
If you are interested our teams would be happy to arrange a call to discuss your proposition, the support we provide and our eligibility criteria.
Closing remarks
Ten years on, today’s advice market is very different to the one that existed prior to the implementation of the RDR.
However, we are aware that we are living in a digital world in which regulation is consistently changing; and therefore, we need to ensure that we keep pace with, and make the most of, these changes.
As I explained at the outset, I am committed to ensuring we have a healthy and successful consumer investment sector in which firms can thrive and consumers can make informed choices about financial products and services.
A key part of this will be to ensure that the regulatory burden on firms is proportionate, whilst still ensuring adequate levels of consumer protection.
We all have a part that we all must play in this, and I look forward to this exciting period of change and leading on delivering regulatory framework that works well for both firms and consumers.
I would like to reiterate my thanks for the kind invitation to speak at your conference today and look forward to working with you on ensuring that in the future millions more consumers are getting the help they need.