The Financial Advice Market Review (FAMR) has today published its report and recommendations. FAMR was launched in August 2015 to explore what steps the Government, industry and regulators might individually and collectively take to stimulate the development of a market which delivers affordable and accessible financial advice and guidance to everyone, at all stages of their lives. FAMR launched a public Call for Input on 12 October 2015, and subsequently engaged with a wide range of stakeholders – representing both the industry (including large and small companies) and consumers.
FAMR explored the supply and demand sides of the market for financial advice and financial guidance, the potential barriers to consumers accessing these services and the potential remedies, in the context of the regulatory and legal framework, the economics of providing advice, consumer engagement and the role of technology.
Although the Retail Distribution Review (RDR), introduced three years ago, sought to remove the potential for commission bias, raise the level of professionalism within the intermediary sector, and improve consumers’ understanding of the services they were receiving, an 'advice gap' remains.
Providing high quality professional advice is costly, particularly given the amount most people have to invest, and is consequently only cost-effective for the more affluent. A 2016 survey suggests 69% of advisers had turned away potential clients over the last 12 months – affordability was the most common reason, with 43% of advisers turning away clients on the basis that the advice services offered would not have been economic given the clients' circumstances.
FAMR recognises that a range of social, demographic and legal changes (such as the recent introduction of pensions flexibility) have increased the range and complexity of the financial decisions people face, in circumstances where more of these decisions are made without any, or with only limited, advice or guidance. The report also notes that some larger firms have recently signalled a return to the advice market, in some cases facilitated by effective and creative use of new technologies.
FAMR concludes that there are areas where intervention by regulators and Government could help the industry to develop new and more cost-effective ways of delivering advice and guidance to consumers, in particular, through more effective use of technology. Increasing consumer engagement with financial services is also deemed critical to achieving a long-term, sustainable solution to the issues identified by the review.
The report sets out a series of recommendations intended to tackle the barriers to consumers accessing advice. These recommendations are, in part, directed at the FCA and the Government but, on the basis that the issue can only be tackled through a collective approach, also at employers, service providers and consumers:
Recommendations (adopting FAMR numbering)
1. As a first step, and to support progress over the next 12 months, members of the FAMR Expert Advisory Panel should form a Financial Advice Working Group, together with members of the FCA Consumer, Practitioner, and Smaller Business Practitioner Panels.
27. The FCA and HMT should work together over the next 12 months to develop an appropriate baseline and indicators to monitor the development of the advice market. These should then be tracked on an annual basis and published on the FCA website.
28. The FCA and HMT should report jointly to the Economic Secretary and FCA Board, 12 months after the publication of this document, on the progress made towards implementation. In 2019, both organisations should conduct a review of the outcomes from FAMR.
Whilst accepting that the RDR has brought about a positive step change in transparency, reduction of conflicts of interest, and the quality of advice available to those with larger amounts to invest, FAMR concludes that steps need to be taken to make the provision of advice and guidance to the mass market more cost-effective. The following recommendations are intended to allow firms to develop more streamlined services and engage with customers in a more effective way:
2. HMT should consult on amending the definition of regulated advice in the existing Regulated Activities Order (RAO) so that regulated advice is based upon a personal recommendation, in line with the EU definition set out in the Markets in Financial instruments Directive (MiFID).
3. The FCA should consult on new guidance to support firms offering services that help consumers making their own investment decisions without a personal recommendation. This should include a series of illustrative case studies highlighting the main considerations firms need to take into account when developing such services and dealing with specific areas of uncertainty identified during the Review.
4. The Review recommends developing a clear framework that gives firms the confidence to provide streamlined advice on simple consumer needs in a proportionate way. As part of this, the FCA should produce new guidance to support firms offering ‘streamlined advice’ on a limited range of consumer needs. This should include a series of illustrative case studies highlighting the main considerations when developing such models.
5. As one of the measures to help develop a simple and clear advice framework, the FCA should consult on modifying the time limits for employees to attain an appropriate qualification in the FCA’s existing Training and Competence sourcebook (TC). This will give firms more flexibility to train a new generation of advisers by allowing employees to work for up to four years under supervision to obtain an appropriate qualification and experience.
6. The FCA should consult on guidance about the cross-subsidisation rules in relation to the interpretation of ‘long term’ and the flexibility allowed.
7. HMT should ensure in transposing and implementing MiFID II that, while meeting obligations under EU law, it does not undermine the FCA’s ability to follow through with the proposals which are designed to give firms the confidence to deliver streamlined advice.
8. The FCA and industry should continue to work together with the aim of bringing about improvements to suitability reports, reducing their length, where appropriate, and the time firms spend preparing them.
9. The FCA should build on the success of Project Innovate and establish an Advice Unit to help firms develop their automated advice models.
10. The FCA should consult on guidance to provide clarity on the standard types of information required as part of the fact find process. In addition, the guidance should also set out key considerations for verifying a fact find that has been performed by third parties.
The Report finds that people often lack confidence when faced with decisions about their finances. The following recommendations aim to help consumers engage more effectively with advice, and to help employers to give more support to their staff on financial matters.
11. The FCA and The Pensions Regulator (TPR) should develop and promote a new factsheet to set out what help employers and trustees can provide on financial matters without being subject to regulation.
12. The Financial Advice Working Group should work with employers to develop and promote a guide to the top ten ways to support employees’ financial health.
13. HMT should explore ways to improve the existing £150 income tax and National Insurance exemption for employer-arranged advice on pensions.
14. HMT should explore options to allow consumers to access a small part of their pension pot before the normal minimum pension age, to redeem against the cost of pre-retirement advice.
15. The FCA should take steps to help ensure that firms and advisers are aware of the existing flexibility in the rules on adviser charging.
16. HMT should challenge the industry to make a pensions dashboard available to consumers by 2019, bringing together industry and consumer representatives to help them set direction and drive progress.
17. The Financial Advice Working Group should publish a shortlist of potential new terms to describe “guidance” and “advice”, with the final choice of words and approach to implementing them to be confirmed after market research and consumer testing.
18. The Financial Advice Working Group should lead a task force to design and test a set of rules of thumb and nudges.
19. HMT should assign the continuing responsibility for the rules of thumb and nudges to an appropriate body with financial capability expertise. This body will be responsible for updating the rules of thumb and nudges and encouraging the use of them by employers, government agencies and charities.
Liabilities and consumer redress
Feedback from many advisers in the course of the review suggested that concerns about future liability are preventing advisers from giving advice today. Recognising both that concern and also the importance of consumer protection in building confidence in the sector, the Report makes the following recommendations to increase clarity and transparency about the way in which the Financial Ombudsman Service deals with consumer complaints, and in relation to the funding of the FSCS to assist advisers struggling to predict and budget for the levy they have to pay:
20. The FCA regularly undertakes funding reviews of the Financial Services Compensation Scheme (FSCS), and FAMR recommends that the 2016 FSCS Funding Review should specifically explore:
- risk-based levies
- reform of the FSCS funding classes, and
- more extensive use of the FSCS credit facility.
The review should explore the merits, risks and practicalities of alternative approaches.
21. Following its review of FSCS funding, in light of evidence received as to the impact of the professional indemnity insurance (PII) market on FSCS funding, the FCA should consider whether to undertake a review of the availability of PII cover for smaller advice firms.
22. The Financial Ombudsman Service (FOS) should consider undertaking regular ‘Best Practice’ roundtables with industry and trade bodies where both sides can discuss relevant issues such as the evidence used when considering historic sales and suitability requirements.
23. The FOS should publish additional data on its uphold rates, specifically around cases where advice was given more than 15 years before the complaint was made, and a breakdown of financial adviser uphold rates by product. The FOS should consider the best way to do this as part of its review into its approach to publishing data more generally and update its stakeholders later this year.
24. The FOS should consider whether to establish a more visible central area for firms on its website by summer 2016, bringing existing resources (e.g. summary of approach, technical guidance notes, case studies, etc.) together in one place to help advisers.
25. The report of the FOS’s appointed Independent Assessor should be expanded to include a more in-depth analysis of the cases they consider and identify potential areas for process improvement from 2017.
26. The FCA should not introduce a longstop limitation period for referring complaints to the FOS. As part of the review in 2019, the FCA and HMT will consider any ongoing trends and the impact of the FOS’s complaints data relating to advice on long-term products.
FAMR considers that, taken together, the package of measures set out has the potential to promote a real improvement in the affordability and accessibility of advice and guidance to people at all stages of their lives. To realise this vision of more affordable and accessible advice and guidance, continued commitment and co-operation will be needed not only from regulators and Government but also from employers, consumer groups and the financial services industry.
Key milestones going forward
- Forthwith, formation of a Financial Advice Working Group
- Q23 2016 – Q2 2017, FCA and HMT to develop an appropriate baseline and indicators to monitor the development of the advice market (to be tracked on an annual basis and published on the FCA website)
- Summer 2016, FOS to establish one-stop website resource area for firms
- 2016 FCA to consider FAMR recommendations 20 and 21 as part of FSCS Funding Review
- From 2017 FOS Independent Assessor to identify areas of process improvement
- By 14 March 2017, HMT and FCA to report to the Economic Secretary and the FCA board on progress in implementing FAMR
- 2019 Industry to make a pensions dashboard available to consumers
- 2019 HMT and FCA to undertake review of FAMR outcomes