The Financial Conduct Authority has warned of "significant" price clustering in the advice market as it warned competition was not operating effectively in the sector.
In its long-awaited review of the advice market post Retail Distribution Review and the Financial Advice Market Review, the regulator sounded alarm bells over "little competitive pressure" amongst advice firms.
This, the City watchdog warned, meant advisers were not encouraged to innovate and offer new and more affordable services, especially to less wealthy customers.
In its evaluation of the market over the past two years the FCA found a "significant clustering" of adviser charges, at odds with the broader distribution charges and incentives for firms to compete on price, which it would usually expect in a "well-functioning market".
The regulator's research found more than 80 per cent of ongoing holistic advice services had adviser charges set at only three price points - 0.5 per cent, 0.75 per cent and 1 per cent.
The FCA said: "As consumers do not appear to prioritise price over service quality, this might be a response by firms to demand, reflecting a simple charging model.
"Our analysis indicates that ongoing services with a 1 per cent annual adviser charge did not have noticeably different features to those charging 0.5 per cent annually.
"This was also the case for one-off advice, where those services charging 3 per cent did not have noticeably different features to those charging 2 per cent or less."
The City watchdog warned these charges were not explained by "economies of scale", with little indication firms with more clients, or more affluent clients, had lower charges.
The FCA also found the market was dominated by the bigger advice players, despite the sector consisting of a high number of smaller firms.
The review found 89 per cent of firms had five or fewer advisers and, although forming less than 1 per cent by number of the firms in the market, firms with 50 or more advisers employed approximately 52 per cent of all advisers in the market.
Improving, but slowly
On the whole, the FCA said the financial advice market was "improving, albeit slowly" since the introduction of RDR and FAMR.
Sheldon Mills, interim executive director of strategy and competition, said: "Our evaluation has found the advice and guidance market is moving in the right direction, but still has further to go.
"We will play our role to support the market to improve further, in the interest of more consumers.
"We will use the evidence base this evaluation has given us, along with the responses to our Call for Input on consumer investments, to shape our work to improve the market."
The FCA is expected to carry out more work in the market during the first half of next year.
With many consumers still holding their money in cash, the FCA called for more innovation in the advice sector.
Whilst the regulator acknowledged there had been some ground gained in the market, in particular around the development of automated advice, it said there was scope for more models and services which could serve more consumers at different stages of their lives.
The regulator's review of the advice market has faced a number of delays in the last 18 months, some of which were as a result of the coronavirus pandemic this year.
The most recent paper on the impact of the RDR and FAMR was published in May last year, when the FCA acknowledged some of its rules might be having a "negative impact" on the market.
At the time the City watchdog asked advisers if its rules were driving too many people to seek advice and if any barriers existed in the market hampering effective competition between firms offering advice and guidance.
The FCA said today: "Our ambition is to facilitate a market that is more innovative and serves a greater number of consumers who will benefit from support at different stages in their lives, and will be empowered to make their own decisions and choices.
"In practice, this is likely to mean a market that provides a wider range of services, including one-off advice models that are available and easily accessible, and where firms compete on the value of the services they offer."
A two-step plan
The FCA advised the market would benefit from a greater focus on two key support services: simpler forms of streamlined advice, and more personalised guidance services.
The regulator acknowledged these already existed but found they had failed to grow in the market on a significant scale.
It said: "Guidance that is more personalised to the specific needs of a customer but which does not amount to regulated financial advice.
"While at present firms provide generic information covering most aspects of financial planning, it is often the case that customers must find the information for themselves and consider how to apply it to their own circumstances.
"For consumers who want an advised service, streamlined advice services provide straightforward, one-off advice to customers with less complex needs.
"Unlike holistic advice services, streamlined advice provides a personal recommendation limited to one or more of a customer’s needs -as this is a simpler service, charges for customers should be lower, making it more affordable."
rachel.mortimer@ft.com
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