Advice Guidance Boundary: Proposals for closing the advice gap

Summary and review of the latest Policy Paper DP23/5¹

The Financial Conduct Authority’s (FCA) Financial Lives survey shows that only 8% of adults took financial advice in 2022,² reflecting that most consumers remain unconvinced they would benefit from taking any guidance, and when they do, their needs are not being fully met. The FCA understands that ambiguity in the regulation around advice has created a barrier for firms to provide varying levels of support for consumers to start their investment journey.

To deliver systemic change to the market, the UK government and the FCA are exploring three proposals that will sit alongside existing guidelines to give consumers greater levels of support when making financial decisions. We detail each proposal in the next section incorporating our take based on the industry forums and insights from our clients.

Advice gap proposals

I.  Further clarifying the boundary

Many FCA-regulated financial advisors are currently reluctant to expand into "guidance" to serve a broader audience with lower-touch services, for fear of straying into regulated advice territory without the requisite level of personal data to give individuals an appropriately personalized recommendation. This overly cautious approach stems from the potential risk of misinterpreting the regulatory requirements that apply to providing financial recommendations. The FCA is therefore seeking to provide greater clarity on this opaque boundary and proposes to do so in two ways:

1. Identifying scenarios where financial support differs from a personal recommendation; and
2. Simplifying existing guidance.

The desired impact for FCA-regulated firms is clear: gain certainty of and greater confidence in how they can support consumers more under the existing regulatory framework without financially advising them. For example, firms may send consumers personalised communications and warnings at no charge, but they cannot direct them towards a particular financial product.

While clarifying the boundary is a positive step, we know from talking to our clients that there is still confusion among wealth managers. That said, we believe clarifying the boundary will either serve as a useful confirmation or give confidence to more risk-averse providers. As a standalone measure, this initiative is unlikely to transform the advice gap. These clarifications could empower some providers to broaden their reach. However, much rests on the precise clarifications and how they are interpreted by regulated businesses.

II. Targeted support

Clarifying the boundary in proposal 1 will provide clarity to the current regime, however, it can only go so far. While it may empower some providers to provide more in the way of "guidance", this may still not bridge the gap in providing consumers the confidence in making investment decisions due to it being generic and not personalised. To bridge this gap, FCA is exploring a new regulatory framework where firms would be able to suggest products or courses of action based on a target market rather than fully individualised support. This involves leveraging digital technology to gather insights to design products based on “people like you”.

The key impacts of this proposal are as below:

1. Firms will be able to use limited personal information i.e. age, time horizon, risk appetite, about a customer and suggest actions appropriate to a person with similar circumstances,
2. This proposal will maximise the consumer reach by allowing firms to offer targeted support without explicit charges, e.g., without upfront fees; and
3. Firms could offer targeted support without charging an explicit charge but can perhaps recover costs by cross-subsidising from other services they provide.

We believe this option could provide an ideal entry point to for investors who are just starting their investment journey. As a consumer, it would be more straightforward to get matched to a target market with the basic data points provided without any fee obligation to start, instead of diving in on a personalised financial advice set up right away. Firms can go further by offering suggestions on a range of new products to help consumers narrow down their options. That said, targeted support will still be a suggestion, not a recommendation, hence firms need to be wary of how they frame the communications to customers. Disclosure points regarding factors outside of the information provided affecting the effectiveness of the product should be explicitly provided.

By relying on cross-subsidisation and not on commission, targeted support will mainly benefit larger, vertically integrated firms, who already have a good pool of data to categorise target markets and suggest investment pathways to consumers. This option would need to comply with relevant Consumer Duty requirements to ensure the amount of information collected and the suggestions are only directed to people with relevant needs.

III. Simplified advice

While the targeted support aims to close the gap by providing more general guidance based on a customer’s market segment, the FCA also suggests the development of a new framework for simplified advice. The FCA proposes that simplified advice should be a limited form of advice, focusing on one specific need and not involving extensive analysis of a consumer's overall financial circumstances. The aim is to address challenges in making financial advice more accessible and affordable, particularly for consumers with smaller sums to invest or specific needs. The FCA acknowledges the limitations of previous attempts, such as 'Streamlined Advice' and the proposed core investment advice (CIA) regime, and now seeks to build a more effective and widely adopted simplified advice model.

The proposed framework for a new simplified advice regime aims to strike a balance between providing affordable advice and ensuring regulatory requirements are proportionate. The distinction between targeted support, holistic advice, and simplified advice is highlighted, emphasizing the need for consumers to understand the nature and limits of simplified advice. Thus, the regulatory protections for simplified advice come along with the level of risk of the underlying activity. This means a more streamlined regime with a narrower scope of products and services that can be advised upon.

The FCA suggests expanding the product range beyond the originally proposed Stocks and Shares ISAs. For example, increasing the investment limit for simplified advice to £85,000. This kind of product expansion would make simplified advice available to a broader range of consumers and is commensurate with the direction the industry needs to go. There are factors to consider ensuring to ensure consumers understand the limitations of simplified advice and can differentiate it from other more comprehensive models, but the increased accessibility to simplified advice will open investment opportunities for consumers with smaller sums to invest or specific needs. Additionally, by streamlining the advice process, limiting the scope, and establishing a new framework with legal certainty has have the potential to be more cost-effective and confidence building for both firms and consumers.

Conclusion

The FCA and the UK government are seeking to address the advice gap through three proposals: clarifying the boundary for firms between supporting customers and providing financial recommendations, improving the provision of targeted support using digital technology, and facilitating streamlined and affordable simplified advice for customers. The goal is to create a continuum of support, making informed financial decisions more accessible to a broader audience and thus increasing the investor pool. This review is a positive step by the FCA, and we see great potential in the three proposals in conjunction with each other as each one has an opportunity to address the current advice gap problems in varying consumer tiers. Assessment and feedback from the industry will play a key role for the FCA in delivering the proposed solutions and we expect these proposals to be refined over the coming months.

_{[1] The Financial Conduct Authority, Advice Guidance Boundary Review: Proposals for Closing the Advice Gap, December 2023, Policy Paper DP23/5}

_{[2] The Financial Conduct Authority, Financial Lives 2022: Key findings from the FCA’s Financial Lives May 2022 survey, 26 July 2023, Financial Lives 2022: Key findings from the FCA’s Financial Lives May 2022 survey}