'Can the FCA's simplified advice regime succeed where others have failed?'

At the Association of British Insurers, we are supportive of a new simplified advice regime to provide confidence, reassurance, and a human touch for those unable or unwilling to pay for holistic financial advice, but who still need a personal recommendation to take one-off decisions on their finances.

We said as much in our response to the FCA and Treasury’s policy paper last week, with a few additional suggestions: that decumulation decisions should be within the scope; the investment limit raised; and aspects of the regime to be set out in rules rather than guidance.   

But the FCA has tried simplified advice-type reform before, and yet the advice gap remains. Why is that? Why should we expect such a regime to be successful now when it hasn’t necessarily worked out in the past?

To find out, we spoke with five of our members and seven ex-regulators and consumer advocates who were involved in previous reviews in late 2023. We hoped that the lessons we learned could be helpful for FCA and Treasury officials working on the current attempt at simplified advice.  

Our one-hour interviews covered the impact of the Retail Distribution Review and the Financial Advice Market Review on the advice market; the application of basic, streamlined, and abridged advice; the role of technological innovation; liability, and much more.  

Seven key findings emerged from the discussions; these were the common threads pulled out from a tapestry that included simplified advice sceptics and proponents. 

Co-ordination needed

Government needs to be co-ordinated, with the Treasury and FCA working together on a timeline that does not rush review outcomes.

Interviewees commented positively on the collaboration embedded within the current Advice Guidance Boundary Review.  

Consumer duty

The consumer duty is a positive step forward. It encourages firms to do more to support consumers, leading to less reliance on disclosures and better design and understanding of target markets, which can simplify the information to be collected to provide advice to a specific segment on a specific need.  

Consumer understanding

Consumer understanding is a challenge, both in terms of encouraging demand, as people don’t understand what advice is and so don’t see its value, and attempting to delineate between holistic financial advice, simplified advice and financial guidance.  

Commercial viability

Commercial viability can be tricky but there is hope. Removing parts of the suitability assessment and fact-find may not reduce cost significantly. But lower-cost advice processes have been achieved, for example basic advice, focused advice and abridged advice.

There are supply and demand-side challenges that need to be overcome, with regulatory clarity a necessity to avoid concerns around liability.  

Technological drivers, such as artificial intelligence-powered tools, open finance, and pensions dashboards will help – assuming customers are willing to engage with them.  

Digitisation 

Robo, digital-only channels are not the whole solution.

For many, some form of human communication with the customer is needed to provide reassurance, to give confidence, or to simply explain the recommendation.  

Regulatory clarity

Regulatory clarity on the advice process is needed to give firms confidence to innovate and introduce new propositions, with clarity needed on the FCA’s approach to supervision and published guidance from the Financial Ombudsman Service on how it would adjudicate complaints (with examples).  

Protection products

Protection products are relevant for any simplified advice process and protection insurance should be included within the Advice Guidance Boundary Review 

In short, the consumer duty and the FCA and Treasury’s collaborative process and technological innovation are causes for celebration, but there are supply and demand-side challenges that need to be overcome, with regulatory clarity a necessity to avoid concerns around liability.  

To help tackle these challenges, some interviewees identified key features for any new simplified advice regime to be viable. (Note that no single interviewee nor the ABI is endorsing all the features below.) 

1. Scope

Simplified advice could be restricted to a narrower product range or a narrow set of scenarios/needs. Although the idea of kitemarked products was not supported.

It won’t necessarily be easy, but simplified advice is a goal worth achieving.

Participants thought the simplified service would more likely be offered by insurance companies, banks and asset managers with direct client banks.  

2. Fees and charges

Firms/advisers could be allowed to wrap advice fees into product fees, to help convince consumers who are not willing to pay an upfront charge for advice but who can afford and will receive fair value from the service.    

3. Advice process

There could be a narrower suitability assessment and shorter fact-find based on the specific need, with triaging at the beginning of the process to filter out those with complex needs, who are better suited for full advice, or those in debt or without emergency savings that are not well placed to invest at all.  

4. Qualifications and remuneration

Qualification requirements could be lowered for the more heavily prescribed advice process, which would reduce simplified adviser salaries and therefore the price of simplified advice. 

5. Regulatory framework

Amendments to Mifid may be needed to create a simplified regime, with a new Cobs chapter prescribing aspects of it, for example setting out a triaging questionnaire or outlining a full decision-tree approach. This would tackle liability concerns and reduce oversight and monitoring costs.

Fos would usefully give guidance and examples on how it will adjudicate complaints within a new regime.  

For the full findings, including the list of research participants/interviewees, see Appendix 1 of the ABI response to DP 23/5.  

It won’t necessarily be easy, but simplified advice is a goal worth achieving and we hope these lessons can be helpful for FCA and Treasury officials driving this work forward. 

George Ritchie is a senior policy adviser at the ABI