How much of an uphill struggle is a simplified advice regime?

In 2016, a report on the Financial Advice Market Review noted previous attempts to design a system enabling firms to deliver cheaper forms of advice, but that they had not gained traction in the mass market.

And more recently in November 2022 the FCA proposed a new core investment advice regime, with the aim of broadening access to advice of narrower scope; but these received “limited support” from the industry, the regulator said.

So with the advice guidance boundary review marking another attempt at closing the advice gap, how much of a feat is the FCA and Treasury looking to achieve?

“History, and not just the attempt at core investment advice, shows it is notoriously difficult to come up with workable simplified advice models,” says Aegon’s pensions director Steven Cameron.

“The challenge is to be able to safely ringfence an area of need to focus on, and to make that cost effective to then deliver upon. To me, the biggest concern in the discussion paper is the suggestion that advice firms wouldn’t be able to offer targeted support.

“Ideally, adviser firms should be given the chance to explore how best to enhance their range of support, be it under simplified advice or targeted support. This looks like the best way of delivering the continuum of support services the FCA and Treasury are aiming for.”

The discussion paper sets out three options to fill the advice gap, namely further clarifying the boundary, targeted support, and simplified advice.

The third proposal for simplified advice requires deciding, among other things:

• what should, and should not, be in the scope of simplified advice; and
• how to charge for simplified advice but, as the paper states, “without undermining the changes made as part of the RDR”.

Clive Gordon, a senior adviser at Sicsic Advisory, a regulatory and risk consultancy, likewise notes how the FCA has previously made unsuccessful attempts to launch simplified advice regimes. But this time, he says, there are reasons to be optimistic.

“Having experienced the limited industry support for core investment advice regime proposals [in 2022], the FCA has become bolder than before to get industry buy-in it needs for this to work.

“Increasing the scope from £20,000 to £85,000 will help, as will the regulator being prepared to set out in rules, rather than guidance, the only client information that firms will have to collect.

“Making advice affordable to consumers is also key to success. The FCA now seems happy to allow targeted support to be cross-subsidised and therefore free at the point of use, and the same approach for simplified advice would be worth considering.”

In previous proposals for a core investment advice regime, the FCA suggested an investment limit of £20,000, but is now exploring the option of increasing the upper limit for receiving simplified advice to £85,000.

Jenny Davidson, Quilter’s commercial proposition director, says the new proposals have not moved the needle very far from the previous consultation on core investment advice in 2022, but that the FCA has sought to make the regulatory requirements more proportionate in a bid to make it commercially viable.

“It is essential that the fact-find process is as efficient as possible, while giving firms confidence that they have captured sufficient information. Therefore, this needs to be prescriptive and captured in [the FCA's] handbook rules.

“These proposals help to make simplified advice more commercially viable and could mean firms are able to support someone through their financial life cycle, starting with simplified advice and then, as their needs change, moving towards full advice.”

Although the proposed changes help move the industry closer to achieving a form of simplified advice, Davidson adds that it still requires significant investment in technology and new processes from the industry, and therefore an upfront cost for firms.

And with a personal recommendation being a key difference between the targeted support and simplified advice proposals, Davidson says this makes it more process-intensive and costly for firms to offer than targeted support to lower wealth segments.

Satisfying stakeholders

Michael Lawrence, a principal consultant at regulatory consultancy Bovill, likewise cites economics as one of several key factors likely to “make or break” a new simplified advice regime.

“Simplified advice needs to work from a commercial perspective. Previously, firms have struggled to create a compelling business case for a distribution model where the inherent costs can eclipse the modest returns produced by low fees and low investment amounts.

“The FCA has looked to tackle this by upping the amounts that can be invested, offering greater flexibility on how charges are levied, and ‘right-sizing’ the qualification requirements.

“This will undoubtedly help but whether it’s enough to tempt firms remains to be seen, especially when many firms are likely to view the review’s targeted support proposal as offering a more commercially attractive and less risky alternative.”

Legislation is changing and pensions are being used as a political football.Caitlin Southall, Curtis Banks

Besides the supply side, consumers are another consideration. “Forms of more streamlined advice exist already under the existing suitability regime,” notes Lawrence.

“Fintechs and established firms have developed a range of digital and hybrid advice models, which have suffered from limited take-up by consumers. Limiting factors are likely to include consumers’ understanding of the value of advice, their ability to shop around on price and quality, and their willingness to pay for advice.

“So the risk for firms is that even if they are able to build a compelling, high-quality simplified advice model, there is no guarantee consumers will follow.”

There is also the matter of political support. With the advice guidance boundary being jointly reviewed by the regulator and government, some in the industry have highlighted the importance of cross-party support.

“There are a number of hurdles that the FCA will face if it is determined to implement simplified advice,” says Caitlin Southall, pensions technical manager at Curtis Banks.

“Legislation is changing and pensions are being used as a political football, so clarity must be provided at the outset of any of the proposals coming to fruition to avoid the potential for poor consumer outcomes.”

But with the FCA saying it had been told to take its time regarding the advice guidance boundary review, there is likely a way to go before any proposals become reality.

Chloe Cheung is a senior features writer at FT Adviser