The regulation of advice – recommendations post FAMR

Introduction

Thank you, Ken, for that introduction. It’s a pleasure to be here.

You’ve come to this conference today to hear viewpoints from across the advice landscape – Government, regulator and industry – on our recent review of financial advice.

The variety of speakers at the conference today mirrors the truly collaborative nature of this Review.

It was conducted jointly by the FCA and HMT, but has relied on, and will continue to rely on, the commitment and cooperation of employers, consumer groups and you, the advisers on the ground.

We were very encouraged by the level of engagement with the Review, and the agreement on the importance of developing the advice market for the needs of consumers today.

FAMR was set up in response to growing concerns that the advice market was not working as well as it could for everyone.

The recommendations of the Review, some collective, some individual, have been made with one very clear objective in mind: to ensure all consumers have access to appropriate, affordable advice and guidance, at all stages of their lives.

The recommendations of the Review, some collective, some individual, have been made with one very clear objective in mind: to ensure all consumers have access to appropriate, affordable advice and guidance, at all stages of their lives.

Ensuring continuing engagement from the major players in the advice sector will be critical if we are to deliver FAMR’s aims, and we hope to see cross-sector collaboration continue as we implement FAMR’s recommendations.

The changing landscape

It is worth reflecting first on why we care about this issue at all. The reasons are obvious:-

Social and demographic changes have led to an increasing need for individuals to take more responsibility for their own financial futures.

An ageing population, increasingly indebted youth, changes in the housing market and evolving employment patterns mean a greater number and variety of consumers are in need of advice on how to manage their money.

Related to this is the recent introduction of the most far-reaching reforms to the UK’s pension system in a generation.

The new system gives consumers more flexibility and choice in managing their money in retirement. People clearly want to take advantage of this, with savers having withdrawn almost £6bn from their retirement funds after the pension reforms were introduced last year.

But what these changes mean is that people will be facing, sometimes for the first time in their lives, important and irreversible decisions about considerable amounts of money.

In order to empower consumers to take advantage of the options now available to them, we need a market that provides affordable advice and guidance for everyone, at all stages of their lives.   

And we know that although the decisions consumers now have to make are becoming more complex and significant, people are making more decisions without any, or with only limited, advice or guidance.

Some of this reflects positive, and well placed, confidence in the ability to use sources of information such as web-based services.

However, some of it is not so positive and is driven by consumers’ perceptions of financial advice.

High quality, personalised and comprehensive advice is expensive to deliver and, for smaller sums of money, may not be cost effective.

In addition, those who say they would not consider paying for advice often appear to have a limited understanding of the benefits of advice; others just feel that advice is “not for them” or say they don’t feel confident engaging with the topic. Let’s be honest, financial planning doesn’t set most people's pulses racing.

This is compounded by a distrust of financial service companies. Recent scandals in the wholesale and retail banking industry have damaged the reputation of financial services and this continues to discourage consumers from approaching financial advisers.

So, in this new landscape, we have identified a clear need for intervention to ensure consumers are able to access the support they need, when they need it.

The reforms

It is worth noting here the numerous attempts we’ve previously seen to stimulate the development and growth of the advice market, such as basic advice and stakeholder products, which, while well intentioned, were hampered by a lack of profitability.

Looking carefully at what has gone before, we can see that there is no ‘silver bullet’, no perfect solution to close the advice gap we see today.

It is for this reason that we’ve recommended a package of measures which, in concert, have the potential to stimulate real development in the advice market.

And I would like to stress the importance of the package of measures.

Our view is that each of them is necessary, but not sufficient alone, to deliver the change we seek.

Our proposals fall into three main areas – affordability, accessibility and engagement, and liabilities and consumer redress.

First, let’s look at affordability and, within this, the role of RDR.

The Retail Distribution Review (RDR) brought about positive changes in the quality of advice available to those with larger amounts to invest, by increasing professionalism, removing commission bias, reducing product prices and making it easier for consumers and advisers to compare platforms.

And it is worth reiterating here that the recommendations contained within FAMR do not signal a reversal of RDR. We believe RDR has had a positive impact on the advice market, and the important consumer protections it introduced should not be rolled back.

Thanks to the changes brought about by RDR, the advice market now works well for those with significant wealth. But what about those who are not so fortunate?

For some at this end of the spectrum, barriers remain.

The recommendations FAMR proposes are designed to allow firms to develop more streamlined services to enable them to have confidence to give cost-effective advice on particular limited needs.

These include a proposal that the FCA should set up a dedicated team, called the Advice Unit, to help firms developing mass-market automated advice models to bring these to market more quickly. I’ll return to this later.

FAMR also recommends that the difference between advice and guidance is made clearer.

Over the course of this Review, many firms told us they were reluctant to give guidance to people for fear of inadvertently stepping into regulated advice.

And, in fact, not all consumers need regulated, individualised financial advice. For many, guidance and other forms of support will be sufficient to allow them to make informed decision.

Technology can play a really valuable role here, through the availability of online content, such as tools and calculators, that offers accessible, cost-effective support to consumers with simple needs.

Of the three areas of reform, the affordability strand is where the FCA has the most significant role. However, the advice gap is not just about affordability, it’s also about accessibility and engagement.

Employers play a key role here.

The introduction of auto-enrolment has led employees to increasingly look to their companies for support on financial matters.

In recognition of this, we have recommended that additional tax incentives be created for employers who provide employees with the opportunity to take such advice.

We have also recommended that best practise among employers in supporting their staff in financial matters be better shared and promoted.

We will also be working with The Pensions Regulator to help employers better understand how to navigate regulation when providing financial support to their workforces.

In some areas, particularly pensions, where people can build up several pots in different places over their working lives, it can be difficult for consumers to access data on their own savings. This, clearly, complicates personal financial planning – how can you think about next steps when you have no clear picture of your current pension wealth?

So FAMR recommends making information about consumers’ pension wealth more easily available to them and those that advise them. This is where the ‘pensions dashboard’ Harriett mentioned earlier comes in.

We also seek to address lack of consumer engagement through the use of ‘rules of thumb’ and ‘nudges’ to encourage customers to seek support at key life stages. For example, asking people to think about the protection cover they have when starting a new family.

The last area of focus is liabilities and consumer redress, a topic which I’m sure is pertinent for many in the room.

In particular, firms highlighted the difficulties they have in predicting and budgeting for the levy they have to pay for the Financial Services Compensation Scheme.

In recognition of this, FAMR makes recommendations on funding, which will be taken forward in the FSCS funding review. I’ll return to this topic later.

Firms have also expressed concern that the Financial Ombudsman Service will typically side with the consumer in its processes and adjudications.

It should be said that, in conducting the Review, we didn’t find any evidence of pro-consumer bias.

Indeed, we found that, contrary to the popular narrative, the Financial Ombudsman Service only upholds 39% of all complaints against financial advisers.

However, FAMR does recommend increased clarity and transparency about the Financial Ombudsman Service deals with consumer complaints.

Firms also expressed concern about the impact of indefinite liability on their ability to obtain investment into advisory businesses or to sell them.

In response to this, FAMR closely considered whether a case was made to impose a 15-year longstop on complaints about financial advice.

However, the evidence showed that there were actually comparatively few old complaints about IFAs taken to the Ombudsman – only 216 complaints per year were greater than 15 years old, and only 30% were upheld.

So the impact on advisers overall of a blanket longstop would not be significant. But the impact on a consumer who was unable to get redress on a long-term pension they were mis-sold could be potentially devastating.

It is crucial we strike a balance here – between ensuring firms are willing to offer advice in good faith, knowing that if it is professional and suitable they will not be exposed to costs in the future, but also ensuring appropriately high levels of consumer protection, and making those protections clear and tangible, in order to inspire public confidence in the advice sector.

In light of this, we decided we should not recommend imposition of a longstop.

The role of technology

In addition to the consumer and industry feedback I’ve mentioned, a theme that comes out throughout the Review is the role of technology in bridging the advice gap.

As well as stimulating a more engaging and cost-effective advice market, automated advice offers the chance of ensuring consistent outcomes, thanks to automation and the ability to minimise the risk of human error.

Take, for example, ‘robo-advice’ (which we prefer calling automated advice by the way).

While it won’t be for everyone, it has the potential to be an extremely effective way of providing more affordable and engaging advice for many consumers.

For those who prefer face-to-face advice, we are also seeing a number of hybrid models which give people the option of speaking to an adviser at some point during the automated process.

And it’s not just about automated advice - technology can also play a role in traditional advice. For example, development of portable fact finds and shortening overly lengthy suitability reports doing which FAMR recommends could lead to real progress in reducing the cost of traditional face-to-face advice.

Maintaining momentum

The possibilities these developments open up offer the chance of genuine, meaningful progress in this sector.

So it’s important we don’t take our foot off the pedal.

As I said at the start of this speech, we know that in order to achieve real progress on this important work, we must maintain momentum. Continued focus is required to ensure that these measures are effective.

That is why we have classed advice as one of the seven core priorities in our Business Plan, published last week.

These core priorities will drive our decisions about the policy work we do, our thematic projects and market studies, as well as informing the areas we will pay particular attention to in conducting our core activities.

The fact that advice sits on this list, alongside other big issues like firms’ culture and governance and financial crime, demonstrates the weight we’re putting behind ensuring we do our part to make advice accessible to all and our commitment to ensuring these reforms are effective.

We are committed to making progress at a pace on these issues. We, therefore, expect to see real change over the months and years to come.

We are committed to making progress at a pace on these issues. We, therefore, expect to see real change over the months and years to come.

A key initial area of focus is the new regulatory framework for advice. We aim to have this framework in place as soon as possible, in line with the FAMR timetable.

In addition, we, along with HMT, have set ourselves a series of milestones to ensure we retain focus on delivery of the FAMR objectives:

• First, to support progress over the next 12 months, members of the FAMR Expert Advisory Panel will form a Financial Advice Working Group with members of the FCA Consumer, Practitioner, and Smaller Business Practitioner Panels.
• Second, we will develop advice market indicators to monitor the development of the advice market and measure the affordability, accessibility, and quality of advice and guidance. These will be tracked on an annual basis and published on the FCA website.
• Third, the FCA and HMT will report jointly to the Economic Secretary and FCA Board in 12 months to update on progress made towards implementation. And in 2019, both organisations will conduct a review of the outcomes from FAMR.

However, we don’t want to wait 12 months before we can make progress.

That’s why I can announce now that the Advice Unit will be open for business from May.

The Advice Unit will support the development of automated advice tools that can help provide low cost, high quality advice to mass-market consumers on investments, pensions and protection.

It will be open to firms of all sizes, linking up with our work on Project Innovate.

We will initially be giving eligible firms feedback on how their advice models can meet regulatory requirements and expectations.

We have done this in the past, but we want to make it clear that we want to offer this support more widely and make it more routine. And we want to ensure that other firms can benefit from what we learn about what works, and what doesn’t, as we got through this process.

Later this year we will also be developing a set of tools and resources which will be publicly available to all firms. This might include a set of standardised testing scenarios for firms to use to gauge the effectiveness of their models.

This is an iterative process.

We will continue to adapt the Advice Unit service based on the feedback we receive.

And once we have taken a few firms through the Unit, we will share with the rest of the Industry the lessons we, and firms have learned from these experiences.

We will set out more details in a statement in May, at which point firms will be able to approach us to seek support.

We are also now beginning work on the FSCS funding review.

FAMR recognised that many advisers saw the costs of the FSCS levy as a potential barrier to providing affordable advice.

To address this, FAMR recommended that the FCA’s review of FSCS funding consider how to make the FSCS levy more predictable for advisers, and consider whether it is possible to design a levy that better reflects what is driving costs for the scheme.

Options for this could include:

• Reforming the FSCS funding classes to better distribute the levy among members of the intermediation funding classes;
• Utilising the credit facility available to the FSCS to better spread payments and;
• Introducing a risk-based levy to reflect the risk a firm poses to the FSCS.

We will be engaging with you on these options over the summer, both through bilateral meetings and an industry working group.

We then aim to follow with a consultation in the autumn.

Conclusion

I hope this has made it clear that there is a real commitment to making tangible change as a result of this review of the advice market.

And, as I said at the beginning of this speech, it is crucial that players across the advice spectrum engage with this topic and play their part.

After all, it is in all our best interests – consumers, industry and regulators alike – to bridge the advice gap by embracing these recommendations and applying them at pace.

Because we all want an advice market that is accessible, affordable and appropriate for every stage of a consumer’s life.

And I look forward to working with you to achieve this vision.

Thank you.