Industry and the regulator have a real opportunity to close the advice gap to better serve the millions of UK consumers who are not getting the help they need with their financial affairs, even for the basics like help to determine whether they are financially on track.
The Financial Conduct Authority's Financial Lives 2020 survey found that there are 38m adults in the UK not receiving any formal support with their finance. Just 17 per cent of UK adults with more than £10,000 of investible assets received advice last year, with 29 per cent saying they sought some form of guidance.
We need to address why this is the case and find a solution that will create a more financially resilient population and, in turn, a stronger economy.
The industry has been constrained by the wide scope of the definition of regulated advice, which has prevented advice businesses from providing meaningful, personalised guidance to their customers.
For the past 12 months we have been working closely with the regulator on this. What is clear is that, firstly, consumers, businesses and the regulator are locked in a giant stalemate and, secondly, the current advice rules and the Retail Distribution Review just do not mix well.
To explain the stalemate:
- Consumers: There are high levels of people who do not know how to engage properly in managing their financial wellbeing, yet do not wish to seek professional financial advice.
- Financial services: Businesses would like to extend more support to their customers, but due to risk aversion and the regulatory obstacles of personalising that support, they are not doing so for fear of overstepping into financial advice.
- Regulator: The regulator would like to encourage more support to consumers but it also needs to ensure it maintains a strong set of minimum standards for the provision of regulated advice to protect consumers from detriment.
The regulations around advice are acting like an antibiotic, guarding consumers against the bad actors while killing off well-meaning support initiatives that they would benefit from. With interest rates at record lows, the new detriment that needs to be managed is consumer inaction and holding too much cash.
The UK’s advice rules, which largely derive from the EU, do not mix well with the UK’s RDR. They are like oil and water. The implementation of the RDR in 2012 necessarily dealt with the conflicts of interest occurring in the investment industry, but has since become a major obstacle to consumers taking up advice because it forces them to pay for it even if they do not end up taking out a product.
The UK’s current advice rules, on the other hand, are an obstacle to businesses providing free personalised support, which would be most valuable to those people put off by or unable to pay for advice.
Brexit is a great opportunity to change these EU-led rules. We need a UK regulatory regime around advice that:
- Is built around the support needs of UK consumers;
- Encourages businesses to provide free and cheaper support services to their customers;
- Allows businesses to take the customers’ circumstances and data into account when they provide their support, as is common-place with other industries;
- Accepts that a ‘better’ (not best) outcome for the consumer is an adequately positive outcome, freeing businesses from having to take into account the whole of a customer’s circumstances.
Changing the UK advice rules and breaking the stalemate should be considered an utmost priority. A solution needs to be found that opens up meaningful, personalised support for consumers. The economic devastation caused by the pandemic has only increased the support consumers need.
At Tisa, we are calling for a regulatory regime that supports personalised guidance and simplified advice needs of consumers.
But what does personalised guidance look like?
- Prompts: flagging poor diversification of investments; poor fund performance; and cash holding held for a lengthy time.
- Filtering: triage service that sets out pros and cons of retirement options; tools to help choose the right tax wrapper for the individual.
- Action: encouraging consumers to save more towards their pension, or opt back into their workplace pension if they have opted out; alerting consumers to consider replacing their out-dated, high-cost fund.
Personalisation is key to engagement. We can see this by analysing the success of tech giants who spend vast amounts of time and money honing in on individuals to create highly personalised and streamlined products and services.
Our industry is competing for consumer bandwidth with the industries that are years ahead in their use of data. We too, in financial services, need to take into account our customers’ personal characteristics to become more relevant.
There are a number of innovative initiatives underway that will help the financial services industry harness consumer data. The government’s pensions dashboard initiative will allow consumers to see all their various pension pots in one place.
Similarly, Tisa’s open savings, investments & pensions initiative will allow consumers to see all their liquid assets in one place.
If personalised guidance is left constrained by regulations and the industry cannot build support services on the back of consumer data, we are concerned that consumers will not be able to harness the benefits that these innovative initiatives hold.
As for simplified advice, businesses question how they can provide this service at a lower cost. Providing greater regulatory clarity on the ability for businesses to limit their required fact find is one way to reduce the cost of the service, especially if technology can be harnessed and companies can place more reliance on consumers inputting data.
But time is of the essence. The FCA will shortly determine their priorities coming out of their recent call for input on the consumer investments market.
We cannot expect the regulator (and Treasury) to commit to redesigning advice rules without the business case from industry. This is the time for proposition and compliance teams to come together in businesses to design the support initiatives of the future and what regulatory changes are required.
The thinking that is done over the next few months, and the decisions that get made on the back of that thinking, is going to shape this industry for years to come.
Tisa has had a long-standing mission to unlock the provision of better quality, more personalised financial guidance to consumers. We are the most optimistic we have ever been, since the implementation of the RDR, about regulator and industry working together for the public good of the UK consumer base.
We are working closely with insurers, platforms, pension providers, banks and building societies to help inform a future definition for advice.
If we do not take advantage of the next few months, we might be waiting half a decade or more for the next opportunity.
Prakash Chandramohan is strategic policy director of Tisa