Consumer Investing: FCA Proposes Lower Cost Simplified Advice (2023)

Investing puts one person's idle money into another person's project for mutual benefit. Everyone loses when potential retail investors avoid the market because they feel confused, suspicious or overwhelmed, but many do. One of the UK's reforms aims to encourage investment by relaxing regulations on financial advice. However, past changes have had little impact and need to counteract the allure of online sales patterns masquerading as free advice.

relaxation rules

The rule relaxes in consultation with the Financial Conduct Authority (FCA).CP22/24would create a Central Investment Advisory (CIA) regime giving mass market consumers access to simplified advice. CIA would only be available when opening an Equity and Individual Equity Savings Account (S&S ISA), excluding Restricted Mass Market Investments (RMMI) and Non-Mass Market Investments (NMMI) - higher risk categories introduced byPS22/10which have been in effect since February. Employees who only provide CIA would have lower qualification requirements.

"Proposals are limited to opening simple S&S ISAs, with certain asset classes and ISA subscription transfers exempt from the simplified rule," said Tom Anderson, executive director of the advisory practice at law firm Allen & Overy. "Customers can pay for the consultancy in installments, while lowering the skill requirements for those offering only CIA should reduce training and competency costs for companies."

The regime proposed by the CIA is part of the FCAconsumer investment strategyso that more people with excess cash can invest safely and confidently. The strategy says it is vital to ensure consumers get the advice they need, but much to the FCA's chagrin, past reforms to make advice safer have unintentionally contributed to its low uptake: just 17% of those over £10,000 for invest seek regulated advice.

Concerns about consumer financial advice predate the FCA. Post-Retail Distribution Review (RDR) reforms banned the then-dominant practice of consultants being paid through commissions from product suppliers, replacing them with investors who pay up front for advice.

Eligibility requirements for financial advisers were increased and they had to disclose whether the advice was independent or limited to recommending specific products, usually those of their employer. This has reduced conflicts of interest and improved the quality of advice, but has made it significantly more expensive for consumers.

This became a pressing issue after legislation gave defined contribution (DC) pension holders access to their savings and allowed defined benefit (DB) pension holders to convert and redeem DC schemes. These freedoms and the proliferation of DC schemes are often enough to keep consumers accountable for investing significant sums in retirement savings. Many, especially database owners, have made bad decisions because they weren't properly advised.

financial advice or advice

This is where the regulatory difference between financial advice and consultancy becomes relevant. "Advice" is a personal recommendation for action based on an individual's circumstances. It is regulated and bad advice can result in fines and damage claims. The "Guidelines" are general in nature, largely unregulated and do not contain recommendations: examples include providing information on different types of investments or general principles to be considered. It's similar to the difference between giving directions to a lost person and telling them which stores sell tickets.

The government believed that the guidelines could meet the needs of most consumers, but practice showed otherwise. Companies avoided giving anything more than basic guidance if doing so would cross the board's boundaries, leaving them liable without reasonable fees. While consumers felt a guide was helpful in understanding the basics, they wanted advice before making decisions, but the cost made it out of reach.

OFinancial advisory market overview(FAMR) proposed reforms to reduce costs.

The FAMR recommended that the FCA clarify that counseling involves personal recommendation (conducted byPERG 8.28,8.29E8.30B) and encouraged companies to develop automated advice for the mass market (robo-advice) and to improve the usefulness of advice through the use of case studies. It also wanted a "pension dashboard" that would show consumers information about all their pensions in one place, to be launched in 2019.PS22/12set a deadline for the launch of the panel in August 2023, but nodelaywithout a new date earlier this month.

glacier progress

Aimpactful evaluationby RDR and FAMR found breakthrough advances in improving take-up of advice, minimal use of robo-advice and noting that the average client advised was worth over £150,000. Most of those with investment assets between £10,000 and £100,000 kept all or almost allTo save money. Even among those with more than £250,000, just 36% held less than 25% in cash. In 2022, 9.7 million people held at least £10,000, mostly or wholly in cash, of which 4.2 million had an appetite for investment risk.

The combination of ill-advised people, idle cash and the Internet creates predictable problems. Consumers who make inappropriate and risky investments or fall prey to scams are harmful and discourage others from investing. These issues are at the heart of the Consumer Investment Strategy launched in 2021PS22/10, a newconsumer duty(PS22/9) takes effect in July andCP22/24of the CIA regime are part of the FCA's work plan for strategicsecond year.

closing the gap

To succeed, the CIA regime would need to close a large gap between corporate tax expectations and consumer price tolerance.CP22/24said consumers are willing to pay a flat fee of £250 or 1% of an investment's value for advice, but average fees exceed 3%.

"There are several sides to the cost issue, as companies need to earn a reasonable return on mass-market consulting," Anderson said.

“FCA believes that companies can reduce overhead by employing more technical innovation, but individuals seeking a personal recommendation tend to engage with a person, not robotic advice. There's also a consumer education aspect to low adoption: the FCA survey found that 67% of people with investment assets felt they didn't need advice."

The design of the CIA's regime can complicate efforts to keep costs low. Existing COBS 9A proficiency assessment rules would apply in full, but a company could choose to adopt an approach appropriate to them for CIA by following the draft non-manual guidance in Appendix 2 CP22/24. Likewise, pure CIA consultants would have lower qualification requirements, but still fall below most competency requirements. They would also be supervised by someone qualified at least in TC Activity 4 (Financial Planning Level 4 Diploma), including pre-sales checks.

practical concerns

Putting a client on an exclusive CIA runway can pose practical problems. The suitability of a core S&S ISA for one person does not preclude other investments from being better suited to one's goals and risk tolerance. A pure CIA adviser could not advise on the merits of other investments, and since every problem for someone with a hammer has a hammer solution, they could still promote an S&S ISA. Highly skilled and therefore expensive caregivers may need to be directly involved at various stages.

"One issue is how streamlined and less expensive the CIA can be given the need for initial proficiency testing and oversight by dedicated CIA consultants," Anderson said.

"Paying in installments can increase administrative costs and raises the question of what happens to the fees when someone sells their S&S ISA. You can see the benefits that the FCA is targeting, but it will be interesting to see the responses to themCP22/24."

The FCA plans to publish the final CIA Rules of Procedure this spring, with implementation scheduled for no later than April 2024. It hopes the new consumer tax will help keep CIA prices low and that the two measures will contribute to the FCA's goal. consumer investment strategy of a 20% reduction in risk-tolerant consumers who will have more than £10,000 in cash by 2025. It doesn't take long for people to get into the habit of investing in mainstream products.

This article was published by Thomson Reuters Regulatory Intelligence.