Consumer investments: FCA proposes lower-cost streamlined advice

Investment puts one person's unused money into another's project, to their mutual benefit. Everyone loses if potential retail investors shun the market because they feel confused, distrustful or overcharged, but many do. One of the UK's reforms aims to encourage investment by easing financial advice regulations, but earlier changes had little impact and these must counter the allure of online sales patter masquerading as free advice.

Rule relaxations

The rule relaxations in Financial Conduct Authority (FCA) consultation CP22/24 would create a Core Investment Advice (CIA) regime, giving mass-market consumers access to simplified advice. CIA would only be available when opening a stocks and shares individual savings account (S&S ISA), excluding restricted mass-market investments (RMMI) and non-mass-market investments (NMMI) — higher-risk categories introduced by PS22/10 that have applied since February. Staff who only provided CIA would have reduced qualification requirements.

"The proposals are limited to the opening of plain vanilla S&S ISAs, with certain investment categories and transfers of ISA subscriptions excluded from the streamlined regime," said Tom Anderson, an executive director in the consulting arm of law firm Allen & Overy. "Customers would be allowed to pay for advice in instalments, while the reduction in the qualification requirements for those only providing CIA should reduce firms' training and competence costs."

The proposed CIA regime is part of the FCA's Consumer Investments Strategy to get more people with surplus cash to invest, and to do so safely and with confidence. The strategy says that ensuring consumers can get the advice they need is vital but, gallingly for the FCA, earlier reforms to make advice safer unintentionally contributed to its low uptake: only 17% of those with more than £10,000 investable take regulated advice.

Concern about consumer financial advice pre-dates the FCA. Reforms after the Retail Distribution Review (RDR) banned the then- prevalent practice of advisors being paid via commission from product providers, replacing it with investors paying for advice upfront.

Financial advisers' qualification requirements were raised and they had to disclose whether advice was independent or restricted to suggesting certain products, usually their employer's. These reduced conflicts of interest and improved the quality of advice, but made it far more expensive for consumers.

That became a pressing problem after legislation gave those with defined contribution (DC) pensions access to their savings and let defined benefit (DB) pension holders convert to DC schemes and cash them in. These freedoms and the spread of DC schemes handed plenty of ordinary consumers responsibility for investing considerable sums intended to cover their retirement. Many, particularly DB holders, made bad decisions because they did not receive proper advice.

Guidance or financial advice

The regulatory difference between financial advice and guidance becomes relevant here. "Advice" is a personal recommendation of action based on someone's circumstances. It is regulated, and giving poor advice can lead to penalties and compensation claims. "Guidance" is generic, mainly unregulated and makes no recommendations: examples include providing information about different investment types or general principles to consider. It is akin to the difference between a lost person being given directions or told which shops sell maps.

The government's view was that guidance could cater for most consumers' needs, but practice showed otherwise. Firms avoided providing anything but basic guidance in case it crossed the line into being advice, thus exposing them to liabilities without commensurate fees. Although consumers felt guidance was useful for understanding the basics they wanted to be advised before making decisions, but the expense put that beyond their reach.

The Financial Advice Market Review (FAMR) suggested reforms to bring costs down.

FAMR recommended the FCA clarify that advice involves a personal recommendation (done by PERG 8.28, 8.29 and 8.30B) and encouraged firms to develop automated mass-market advice (robo-advice) and to improve the usefulness of the guidance by using case studies. It also wanted a "pensions dashboard" showing consumers information about all their pensions in one place, to be introduced by 2019. PS22/12 set an August 2023 deadline for dashboard introduction, but it was postponed without a new date earlier this month.

Glacial progress

An Impact Evaluation of RDR and FAMR found glacial progress with improving advice uptake, minimal use of robo-advice and that the average advised customer had assets of more than £150,000. The majority of those with investable assets of between £10,000 and £100,000 kept all or most as cash savings. Even among those with more than £250,000, only 36% kept less than 25% as cash. In 2022, 9.7 million people held at least £10,000 mostly or entirely as cash, 4.2 million of whom had an appetite for investment risk.

The combination of unadvised people with money lying idle and the internet causes predictable problems. Consumers making unsuitable high-risk investments or falling for scams is harmful and deters others from investing. Those issues are a core concern of the Consumer Investments Strategy, which launched in 2021. The financial promotion rule changes enacted by PS22/10, a new Consumer Duty (PS22/9) taking effect in July and CP22/24's CIA regime are part of the FCA's workplan for the strategy's second year.

Bridging the gap

To succeed, the CIA regime would have to bridge a major gap between firms' fee expectations and consumer price tolerance. CP22/24 said consumers were prepared to pay a £250 flat fee or 1% of an investment's value for advice, but average fees exceed 3%.

"There are several sides to the cost issue as firms need to make a reasonable return on mass-market advice," Anderson said.

"The FCA feels firms could cut overheads by using more technical innovation, but individuals seeking a personal recommendation tend to want to engage with a person, not robo-advice. There is also a consumer education aspect to low take-up: FCA research found 67% of those with investable assets thought they didn't need advice."

The CIA regime's design could complicate efforts to keep costs down. The existing COBS 9A suitability assessment rules would apply in full but a firm could choose to adopt a proportionate approach to them for CIA, following draft non-handbook guidance at CP22/24 appendix 2. Similarly, CIA-only advisors would have lower qualification requirements but still be under most competency requirements. They would also be supervised, including pre-sale checks, by someone qualified for at least TC Activity 4 (level 4 financial planning diploma).

Practical concerns

Putting a customer on a CIA-only track could raise practical problems. A core S&S ISA's suitability for someone does not exclude other investments from being a better match with their objectives and risk appetite. A CIA-only advisor could not advise on other investments' merits and, as every problem has a hammer solution to someone with a hammer, they might push an S&S ISA regardless. The highly qualified and therefore costly supervisors might have to be directly involved at several stages.

"One question is how simplified and lower-cost CIA can be, given the need for initial suitability tests and to supervise CIA-only qualified advisors," Anderson said.

"Payment by instalment could increase administration costs and raises the issue of what happens about fees if someone divests their S&S ISA. You can see the benefits the FCA is driving at, but it will be interesting to see the responses to CP22/24."

The FCA plans to release final CIA regime rules this spring, with implementation before April 2024. It expects the new Consumer Duty to help keep CIA prices down and that the two measures will contribute to the Consumer Investments Strategy goal of a 20% reduction in consumers with higher-risk tolerances holding more than £10,000 in cash by 2025. That is not long for people to acquire the habit of investing in mainstream products. 

This article was first published by Thomson Reuters Regulatory Intelligence.