The deadline for responses to the FCA’s consultation Retail Investment Advice: Clarifying the Boundaries and Exploring the Barriers to Market Development closed on 10 October.
At Tisa, we will keep an eye on how this develops and whether the industry is at last able to provide a simplified distribution mechanism that satisfies the regulators, providers, advisers and most importantly, customers.
We believe that a well-functioning retail investment market needs different delivery mechanisms to be fully effective for the broadest range of potential investors. There are benefits to well-designed, low-cost methods of meeting customers’ straightforward needs – the challenge is to ensure that such methods deliver good outcomes for customers in a way that is viable for firms. We know that firms want greater clarity about how they can help customers to make informed decisions without stepping over the boundary into providing personal recommendations.
When the retail distribution review was introduced in 2012 it fundamentally changed how retail investment advice was given. It banned commission, and now advisers charge an explicit, obligatory fee for advice.
However, the market has not developed as anticipated by the regulator. The boundaries between sales models that provide personal recommendations on retail investments, like simplified advice models, and those that do not remain unclear to providers. So why have ‘new’ service models not yet appeared in the market?
Firms are uncertain about the breadth of the suitability standard for providing personal recommendations online, especially for simplified advice. Unfortunately, the current limits are not clear and understood by the market. Automated advice processes will invariably deliver this type of service, but the worry is that they could result in systemic mis-selling and potential liability issues. This calls into question the viability of these processes. Providers also fear that the regulator might order a past business review, either against one firm or the whole industry, with all the inherent reputational cost and brand damage that entails.
Similarly, provider firms believe they have to price into their models the risk that they may have some liability for simplified online advice, even if the customer later decides to transact elsewhere. This could be resolved by giving the customer a simple and clear statement at the start of the process to ensure they understand their rights and remedies if they use that service. However, the FCA would need to move away from considering that the duty of care in the case of simplified advice in relation to retail investment products includes having to deal with wider considerations, such as the absence or insufficiency of protection insurance. This is important if the concept of simplified advice is going to be developed by some of the bigger and more conservative players, such as banks and life insurance companies, who need to spend millions to develop systems to cater for potentially very high volumes of customers.
Another concern is how best to build distribution models for this market, which is low-cost by nature. Increased levels of compliance oversight would defeat the object of a streamlined process. The regulator is also concerned with the inability of firms to filter out customers for whom the simplified advice process is inappropriate.
We think the FCA should be much clearer about simplified advice, and marry its guidance on the subject with its own handbook. It should distinguish simplified advice much more fully from both full advice and execution-only. This is particularly the case in relation to those execution-only businesses that, in an effort to avoid liability, state that they are not giving advice when they are as close to doing so as they can get away with, or are actually inadvertently doing so.
There are 90,000 funds available within Europe, and 90 per cent of UK adults manage some of their day-to-day affairs online, some of whom will be making investment decisions. However, the industry and regulator must to do more to help investors understand the distinctions between regulated advice, personal recommendation and guidance. This is crucial, given that many working in the industry struggle to understand those differences. It might be simpler to state that a service is either non-advised or advice, and that regulated advice should only apply where personal recommendations are made.
Thinking back to the consultation, we agree with the FCA’s assertion that the instinct to trust people with their own money is a good one. However, it is clear to us that even the more sophisticated investors do not behave in a consistent fashion. More than a third (34 per cent) of risk-based investors delegate the majority of their portfolio to an advice process, but not all of it. We are in an era of omni-channel distribution, and it is important to resolve the issue of multiple labels around advice, something that currently is confusing to consumers.
Carol Knight is operations director of Tisa
