At various times over the last decade or so, the FCA and the FSA have flown the flag for pared down advice models aimed at providing simpler and lower cost advice solutions for the mass market.
This April saw the publication of the latest in a long string of guidance papers from the regulator designed to provide clarity and guidance to the industry with a view to stimulating the development of such models.
But will this latest attempt allay the industry's fears of increased and uncertain liability for mis-selling or is the industry now ready to take that leap of faith and start recommending their clients take out financial products without knowing the full detail of their financial circumstances?
The Sandler Report recognises that the economics of distribution in the UK savings market made it difficult for low/middle income consumers to access investment products.
Basic Advice: A form of regulated advice, where firms could sell stakeholder products through a streamlined process focused on pre-scripted questions.
The regime did not take-off in the way the FSA had hoped. Firms were concerned that they could not structure a Basic Advice proposition which sufficiently minimised the risk of mis-selling and thought the FSA and the FOS might judge Basic Advice sales against the standards required of full advice.
In its initial Retail Distribution Review (RDR) discussion paper, the FSA floats the idea of ‘Primary Advice’.
Primary Advice: A brand new regulatory regime, likely to include the significant reduction in the FSA’s suitability requirements, designed to support the development of simpler, standardised processes to serve the needs of those consumers who may not be able to access full financial advice.
As the RDR consultations progressed, ‘Primary Advice’ became ‘Guided Sales’ and advised guided sales, ‘Simplified Advice’.
The FSA said they would only develop a new Primary Advice regulatory regime where the industry made a clear case for them doing so. As a result of industry concerns over future liability, the FOS’ approach and regulatory uncertainty, the FSA did not develop a new regulatory regime.
Instead the FSA opted to issue guidance to help firms develop simplified advice propositions within the existing regulatory framework, including the suitability requirements.
FSA and FCA published guidance to assist firms in developing Simplified Advice processes within a regulatory regime which does not recognise a difference between ‘simplified’ and ‘full’ advice.
The Financial Advice Market Review (FAMR) is launched in response to concerns that the financial advice market, and the regulatory and legal framework governing it, was not working well for consumers.
One of the recommendations in the report is to develop a clear framework to give firms the confidence to provide streamlined advice on simple consumer needs in a proportionate way. The FCA should produce new guidance to support firms offering ‘streamlined advice’ on a limited range of consumer needs.
The FAMR report described Streamlined Advice as:
’A term used to collectively describe advisory services (such as focused and simplified advice) that provide a personal recommendation that is limited to one or more of a client’s specific needs. The service does not involve analysis of the client’s circumstances that are not directly relevant to those needs.’
The FCA describes focused and simplified advice as the following:
- Simplified Advice involves a firm setting out the boundaries of the service it provides.
- Focused Advice involves the client stipulating the boundaries of the service.
Streamlined Advice models provide advice limited to one or more of a client’s needs, rather than assessing their financial needs as a whole. For example, providing advice on the investment choices a client should make within their stocks and shares ISA, without providing advice on the client's existing investments or their protection or retirement needs.
The FCA anticipates that many Streamlined Advice services will be automated, so the guidance is intended to reflect that approach.
Has the new guidance allayed the industry’s fears about future mis-selling liability?
Where Streamlined Advice involves a personal recommendation, the FCA suitability rules will apply as they do for full advice. The latest developments therefore represent just a further round of guidance from the regulator and not the development of a new regulatory regime. The existing concerns of the industry – that they would carry additional future liability if they make a personal recommendation without having undertaken a full assessment of the client’s financial circumstances and their needs as a whole – will be unchanged for many.
But has the industry changed?
The FAMR firm survey asked firms for their views on the barriers to offering mass market advice; lack of regulatory clarity was again cited as one of the biggest barriers. In its recent FAMR Baseline Report (PDF) however, the FCA has suggested that the industry’s views on clarity of FCA’s expectations may need to be “disentangled” from their own risk appetites, which may in fact be preventing them from adopting new models.
Is there some truth in this?
Automated advice models are estimated to make up less than 1% of the total current assets under advisement in the UK. The FCA’s intelligence apparently suggests that there are approximately 100 ‘robo models’ either already launched or in development across a broad spectrum of services ranging from simple budgeting, non-advised investment, discretionary investment management and online personalised recommendations, and our experience at Burges Salmon would support this view.
It is possible that these so-called ‘disrupters’, have a higher risk tolerance than established firms and may take the opportunity of Streamlined Advice, coupled with technological advances, and run with it.
It is conceivable that the industry may, at last, see a shift-change that enables Streamlined Advice to succeed where Basic Advice and Simplified Advice failed.
What happens next?
- The FCA aim to publish their response to GC17/4 in September.
- The draft guidance takes into account MiFID II and will come into effect at the same time as the new FCA rules implementing those changes i.e. 3 January 2018. However, the FCA is clear in the GC that the guidance applies equally under the current rules, so firms using or developing Simplified Advice models now need to begin considering and applying the guidance.