New advice definition could be ‘silver bullet’

In the Financial Advice Market Review input paper, published in October 2015, the Financial Conduct Authority and HM Treasury reported in 2007 that two-thirds of retail investment products were sold with professional advice.

However, in recent years the FCA reported it had seen a decline in the number of financial advisers offering professional advice - from around 26,000 in 2011 to 24,000 in 2014.

A number of major providers have cut back their professional advisory businesses, or left the market, the regulator stated, while the remaining advisers have increasingly focussed on high net worth individuals.

The Financial Advice Market Review final report published in March acknowledges this shift in the make-up of the financial advice industry and how it has hit consumers.

The report states: “There are some consumers whose straightforward needs or lower amounts to invest mean the cost of regulated advice outweigh the benefits.

“Some firms may find it uneconomic to provide these customers with this type of advice.”

However, even with low-cost guidance, FAMR found advisers and providers were reluctant to offer this “for fear of straying into the provision of advice”.

It has been difficult, FAMR recognised, to navigate between guidance and advice, and the risks involved with regulatory requirements applying to factual information or advising on the merits of certain investments.

Therefore, it proposed amending the definition of ‘advising on investments’ in the existing Regulated Activities Order, article 53, in line with the European Union’s Markets in Financial Instruments Directive’s (Mifid’s) ‘investment advice’ definition.

Because the RAO definition is wider than Mifid, it could be open to interpretation, according to the FAMR report.

Basing a new, streamlined definition on the EU’s standard could make sense and help to bridge the so-called advice gap, the FAMR report suggested.

The report has recommended: “HMT should consult on amending the definition of regulated advice in the existing RAO so regulated advice is based upon a personal recommendation, in line with the EU definition set out in Mifid.”

Any regulated advice which does not involve a personal recommendation will find the Principles for Business and Conduct of Business rules still apply.

Some respondents to this guide believe this is a good thing.

Nick Eatock, executive chairman of software provider Intelliflo, says: “Simplified advice is both possible and being demanded by end consumers and advisers.

“In terms of the clarity of the definition, for the investment journey we believe this is well-defined and relatively straightforward.”

According to Phil Brown, head of policy for life and pensions provider LV, a new straightforward definition should remove a lot of uncertainty, but the definition itself needs more work.

He explains: “A single definition of regulated advice would help clear up confusion and show people the value of regulated advice. However, the new category of ‘streamlined advice’ for customers with ‘simple needs’ requires further clarification.”

Laurence Baxter, head of policy and research at the Chartered Insurance Institute, says: “We strongly welcome the review of the advice definition in line with Mifid personal recommendation will be an important “silver bullet” to help providers and advisers alike help consumers without the fear of straying into professional advice.”

However, Steve Webb, director of policy for Royal London, says FAMR will not be a panacea to reduce the advice gap.

Research carried out among advisers by Royal London found 64 per cent believed the recommendations of FAMR would not close the gap.

Some 77 per cent agreed any streamlined advice should be impartial.

As Adrian Boulding, retirement strategy director for Dunstan Thomas points out, the industry has been through this before.

He says: “Four years ago the then Financial Services Authority unveiled FG12/10, its Finalised Guidance on Simplified Advice.

“The guidance failed to do the job and simplified advice was never defined adequately. During this pre-Retail Distribution Review period, there was feverish discussion in the industry about how to define ‘basic’, ‘streamlined’, ‘simplified’, ‘restricted’ or ‘focused’ advice.

“The only category that made it through the regulator’s wringer was ‘restricted’ advice.”

Given FAMR’s suggestion “one potential approach could be a binary framework distinguishing between ‘guidance’ and ‘advice’ with a personal recommendation.

Many respondents suggested alternative labels (see FAMR Box 6, below). The Financial Advice Working Group is now set to publish a shortlist of potential new terms to describe ‘guidance’ and ‘advice’, subject to market research and consumer testing.

But Mr Boulding is sceptical about having too many terms and not enough clarity of definition. As he explains, because ‘simplified’ advice was never property defined pre-RDR, many banks and building societies pulled the plug on their adviser teams.

He adds: “Does FAMR finally offer an adequate definition of simplified and/or streamlined advice which banks can use as the basis to start rebuilding their teams?

“The jury is still out.”

Source: FAMR, p 49

David Severn, former FSA head of retail investment policy and former director of the then Association of Independent Financial Advisers (now the Association of Professional Financial Advisers), says: “It is claimed the reason firms do not deliver streamlined advice now is because of uncertainty.

“It is difficult to see how more guidance can remove uncertainty as to whether or not a consumer has been mis-sold a product because everything depends on the facts of the individual case.

“The FCA ought not to be giving the industry a blank cheque to sell products through streamlined advice, regardless of the consequences for individual customers.”