Industry welcomes FCA review of advice-guidance boundary

In a speech by the Financial Conduct Authority’s executive director Sarah Pritchard yesterday (September 27), she said the regulator will make sure that it does what is best for the UK, retaining market integrity and protecting consumers.

“One area we are looking at transforming is the advice and guidance rules,” she said.

“Mifid was introduced 15 years ago and had a clear distinction between advice and guidance. 

“Offering advice on what to invest in carries with it a heavy regulatory burden. A full suitability assessment – in effect an in-depth MOT of a customer’s personal financial situation - is needed from a qualified financial adviser.”

A culture of fear has built around providing guidance that risks going anywhere near the blurred advice/guidance boundary. Tom Selby, AJ Bell

Pritchard explained because of the costs involved, only the relatively well-off can access advice on what to invest in.  

“Mass market consumers are often left to navigate a bewilderingly large choice with little support,” she said.

AJ Bell’s head of retirement policy Tom Selby, said the cost-of-living crisis and ructions in currency markets are seeing millions of savers and investors bombarded with information from all angles and facing often complex choices about what to do with their money.

“Those who are willing and able to pay for regulated advice are well served by the market and should be able to navigate through the current storm with a clear-minded focus on the long-term,” he said.

However, those who do not take advice need better, more personal guidance so they can make financial decisions which are more likely to lead to ‘good outcomes’, in line with the FCA’s consumer duty.

“We welcome the FCA’s acknowledgment of this issue and urge the regulator to push forward its review at pace,”  Selby said. 

‘A culture of fear’

Last year, the FCA published its strategy on how it will tackle investment harm and ways in which it will improve the advice market, including the cost of regulation.

As part of its consumer investments strategy, the FCA wants to establish a simplified advice regime for mainstream stocks and shares ISAs where the risks to consumers are relatively low.

“This will remove some of the burden of regulation which currently applies across the board to all advisers,” Pritchard said yesterday. 

“It will also enable firms to reduce their charges and make advice on mainstream investments more accessible to mass-market consumers.”

Pritchard explained that once the FCA has greater rule making powers under the future regulatory framework legislation next year, it will be able to do more.

However, in order to prepare for that, the regulator is to carry out a holistic review of the boundary between advice and guidance to understand how to reduce the regulatory burden while continuing to provide the right level of consumer protection.

“The weight of regulation should be commensurate with the level of risk but moving away from the one-size-fits-all approach mandated by Mifid will be complex and it will need assistance and input from industry,” she said. 

“We are getting ready now for the greater opportunities that will exist in future to set rules that are appropriate for the UK.”

However, AJ Bell’s Selby said: “A culture of fear has built around providing guidance that risks going anywhere near the blurred advice/guidance boundary, with firms and employers keeping a safe distance from the boundary and ordinary people receiving less help making decisions as a result.”

He explained that although there will always need to be a boundary between advice and guidance, firms need a clearer understanding of where that boundary sits and what they can and cannot do.

“The Financial Ombudsman Service needs to be included within this review process, as its interpretation of FCA rules will go a long way to determining how far firms are willing to go when providing guidance to customers,” Selby added.

“Ultimately it may require legislation from the government to address the current advice/guidance impasse, but the announcement of this review is at least a step in a positive direction.”

‘Layering regulatory burdens’

Discussing the review between guidance and advice, Justin King, chartered financial planner at MFP Wealth Management said he was looking forward to hearing more. 

“This is definitely something that is a friction point in the advice process that steers me away from advising on low value investment amounts.”

Likewise, Pimfa head of public affairs Simon Harrington, said it welcomed the regulator’s view that current suitability requirements represent a “significant regulatory burden to providing stripped down, simplified services”. 

“This is a view which we have previously outlined in our paper advancing the creation of a simplified advice service,” he explained. 

“It is right that the regulator seeks to raise the floor on what could be done with a basic understanding of individual investor characteristics rather than lower the ceiling as some others have suggested,” he said. 

“We are committed to working constructively with the FCA to ensure that more mass market consumers are able to access appropriate advice services, which meet their needs.”  

However, Philip Milton, chartered wealth manager at Philip J Milton & Company said he was a bit more cynical.

“If the regulator is told of poisonous weeds sprouting-up and causing consumers direct harm and the regulator does nothing about them, acting immediately on breaches if necessary, then it is failing in its primary duty of ensuring the garden is fertile for sustenance and thus growth,” he said.

Milton argued that the regulator will stifle its progress if it keeps “layering regulatory burdens” upon firms.

We did not agree with all of the rules that were adopted, and indeed we have seen evidence of many ineffective requirements. Sarah Pritchard, FCA

He said the new consumer duty is one such piece of obligation which should not be required and for businesses to have to monitor and report upon – and costs in doing so.  

“These constantly increasing onerous obligations placed upon businesses are oppressive, patronising and unnecessary,” he said. 

“With the new consumer duty for example, forward-looking businesses would be invoking anyway. Again, it is penalising the law-abiding and doing nothing or little against those who breach the rules – or till it is ‘too late’.”

He remained pessimistic around the prospect of a simplified advice regime, questioning who would want to operate within that where the client can complain when the investment falls in value and the ombudsman could deem it ‘wrong advice’ as a full fact find and report were not provided.  

“The prospective liability has to be managed by advisers,” he said. 

Post-Brexit world

Meanwhile, in her speech, Pritchard also discussed moving to a ‘post-Brexit world’ where the FCA supports the government’s ambition under the future regulatory framework to ensure that rules can be tailored to suit our markets. 

“The FCA is already flexing its agility and changing where we can – and where doing so will deliver positive outcomes for markets and consumers - but we will be able to do more once the future regulatory framework becomes law,” she said. 

“Our experience of operating Mifid II over the past four years has given us a good insight into what works in a UK market context and what doesn’t.”

Pritchard explained that some of the rules in place currently were formed on the basis of the collective compromises of 28 countries.

“We did not agree with all of the rules that were adopted, and indeed we have seen evidence of many ineffective requirements,” she added. 

“Policies such as the double volume cap or share trading obligation do not deliver benefit in UK markets, and are ripe for change.”

sonia.rach@ft.com

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