Martin Wheatley provoked plenty of backlash in May when he voiced his concerns that the mass market was no longer being adequately serviced with financial advice. The chief executive of the FCA used the occasion to discuss his fears of a growing advice gap and the potential to plug it with automated advice solutions.
In July, a 56-page guidance paper followed titled Retail Investment Advice: Clarifying the Boundaries and Exploring the Barriers to Market Development, the City watchdog put forward the regulator’s view on what constitutes regulated and unregulated investment advice in a bid to calm fears and help companies struggling to develop simplified, automated advice models.
But despite this pledge to rectify what has become a growing concern since the retail distribution review was introduced in 2012, many advisers were sceptical that automated advice would ever become cost effective and viable from a regulatory standpoint.
According to Alan Parkinson, owner of Liverpool-based CPD Independent Financial Advisers, Mr Wheatley’s criticism of the current advice model as expensive and time consuming was ironic given that RDR regulations explain the current predicament. Without commission, he said “the client is paying us to comply with their own over complex, over zealous regulation.”
Unless the rules are made more lenient, Mr Parkinson concluded that simple, automated advice would be difficult to deliver. He added: “Caveat emptor needs to be revived for all simple matters, with the IFA being paid to carry out a basic conflict check and to transact the business with the best available provider.
“However, the more complex transactions would still require detailed chargeable advice for which liability would need to prevail and a relevant charge for accepting said liability. The rules are as stringent for either full or simplified, which is one reason why the gap has emerged. They may need to be relaxed to enable the adviser to make the smaller transaction commercially viable.”
David Barnett, principal of Middlesex-based DPB Independent Financial Services, was of a similar mind, and claimed that regulation had become “so burdensome” that it was “unfair” and “against all normal law” for the FCA to carry out retrospective reviews.
“Why take the risk of doing something new, that not only requires more new processes but also runs the risk of the regulator deciding this was not the correct way to carry out the business originally and starts fining people as a result. If Mr Wheatley thinks it is possible to automate complicated financial advice, then on the same basis it should be just as possible to automate the regulation of financial services. Think of the billions that would be saved.”
Simon Webster, director of Kent-based Facts & Figures chartered financial planners, was also unwilling to change his advice process and predicted that the FCA was unlikely to see it through because of all the risks involved. While most of the population may be happy with online services, he said that a lower-cost mass market approach with open-ended lifetime liability was something that none of his peers would adopt without reassurances of immunity.
He added: “I would not commit my business to a lower-cost mass market approach with open-ended lifetime liability to retrospective regulatory change. So until the FCA says ‘do this and you – adviser – cannot be touched in the future’, no one with any sense will go down this route. I do not think the FCA actually can do this because then it would be responsible for the advice and the one thing the government does not want is any form of potential future liability.”
For Robin Willison, a senior business transformation leader and former head of direct sales and operations at LV=, advisers should not worry about retrospective action from the FCA or Fos if they are professional in their approach. However, while he agreed that technology has a key role to play, he stressed that without human intervention such a service would be doomed for failure.
He said: “Automated end-to-end online advice is difficult to make work outside of straightforward vanilla and standalone solution, so it won’t by itself tackle the much larger ‘don’t know what I’ve got, don’t know what it is, don’t know if it is right for me’ consumer with existing investments, including those purchased through bancassurers. A large number – probably the majority – of consumers also still value a human voice to reassure and guide.
“Technology can help… but the customer will probably still need another human to help them load on the details of their investments, etc, onto a system or platform. You need human intervention at key sticking points. If we do not provide that all of the current and future online solutions will remain sub-scale and fail. Combining technology and people in a cost/income effective process that engages the customer will be good news for advisers, consumers and the regulator.”
Chris Williams, chief executive of Bristol-based Wealth Horizon, was also forthright on the importance of adopting technological solutions, and warned that such systems were essential to close the advice gap and change the nature of an industry that is “too rigid”.
At present, he said that large segments of society were “not being served appropriately” because the advisory profession was designed to fit business models rather than focusing on the needs of the consumer. Describing the current regime as an “all or nothing approach”, he warned that clients either had the option to pay for full advice or go without it completely, which “does not benefit anyone”.
“Clients’ needs are often very simple and these need to be met first, with additional augmented advice delivered as and when needed,” he added. “The industry, with the support of the FCA, needs to start exploring the middle ground and finding a solid platform on which it can build.
“Technology is the key to bridging the advice gap. Clients are already engaging with technology in their everyday lives and it is a natural starting point when looking for advice. However, this is not only where the advice process should launch from but also, with the right framework, where it should end.”
Mr Williams’ opinion largely mirrored the observations published in a White Paper by Egremont, the management consultancy. The paper, titled From Regulation to Innovation, called for advisers to take heart from Mr Wheatley’s call for a more simplified, mass market advice model in order to save their business models from extinction.
As consumers increasingly turn to digital channels for financial solutions, the report concluded that there had been a “power shift” that could not be ignored. The current “tick-box approach to regulatory compliance”, it added, was not benefiting anyone, and was essentially leading financial advisers to “indiscriminately” follow regulations ahead of putting the customer’s needs first.
But now that the regulatory body has seemingly softened its stance, the White Paper argued that opportunities were there for everybody to profit from changing market dynamics.
It added: “As the FCA has been at pains to emphasise recently this should not preclude financial services providers from making money. Provided that any products sold are a good and appropriate fit for the customer, organisations should feel free to innovate and get on with doing business.”
After issuing its guidance paper, Christopher Woolard, director of policy, risk and research at the FCA, said: “We want to ensure we have innovation in the advisory market and new, lower-cost options available. We aim to address some of the barriers that firms have identified to offering new, streamlined advisory products.”
Daniel Liberto is a former features writer of Financial Adviser
Key points
Martin Wheatley provoked plenty of backlash in May when voicing his concerns that the mass market was no longer being adequately serviced with financial advice
Unless the rules are made more lenient, automated advice would be difficult to deliver
As consumers increasingly turn to digital channels for financial solutions, there has been a “power shift” that can not be ignored.
