Just a fraction of advisers currently have plans to offer a “core advice regime” as proposed by the Financial Conduct Authority, with industry commentators questioning the regime’s’ ability to achieve the regulator’s desire to get more consumers to access simplified advice.
In a survey of 146 advisers by AJ Bell, just 7% intended to offer core advice to their clients, while 41% said they would not provide core advice and 52% remained undecided.
The majority of advisers raised concerns over fees being too low, capacity and potential liabilities that come from offering such a regime, while nearly a third (31%) said their focus was on wealthier clients.
The survey followed the FCA’s consultation paper on core advice “Broadening access to financial advice for mainstream investments” which closed on Tuesday (28th February). In its paper, the City watchdog said its aim was to allow firms to provide mass-market consumers with straightforward financial needs greater access to simplified advice on mainstream products, specifically stocks and shares ISAs.
Previous research from the FCA showed that 4.2 million consumers hold £10,000 or more investable assets mostly or entirely in cash, despite having some appetite to take investment risk.
In order to make it easier for firms to provide stripped back advice to more people, the FCA has put forward several proposals, including reducing qualification requirements for those providing core advice and reframing the existing suitability requirements to reflect the narrower scope and complexity of advice.
It also proposes limiting the possible investments advisers can recommend and restricting advice to ISAs worth £20,000 or less, as well as allowing greater flexibility in charging structures to allow consumers to pay for transactional advice in instalments.
Risk of poor consumer outcomes
However, industry experts have warned that the proposals may unintentionally cause issues for advice firms. AJ Bell noted that focusing on transactional advice risks creating a culture centred on product sales rather than encouraging good long-term outcomes.
Tom Selby, head of retirement policy at AJ Bell, said: “The FCA’s overarching aim of encouraging over 4 million people who might have ‘excess cash’ to invest that money for the long-term, in line with their risk appetite and financial goals, is laudable.
“However, the regulator’s ‘core advice’ reform proposals are extremely limited in nature and at worst, could risk poor consumer outcomes if firms are effectively encouraged to flog products rather than focus on providing ongoing advice. It is also far from clear advisers have the appetite to develop propositions that could sit within this proposed regime.
“Although limited reductions in qualification requirements, a reduced ‘fact find’ and narrower fund range may have a marginal impact on the cost of providing advice, we do not believe this will result in sufficiently lower advice costs to make serving those with ISA funds worth £20,000 or less attractive to the advice community.”
While the FCA envisages a charge for core advice sitting somewhere between £100 and £200, Selby warned that this will likely see a return to a product-sales focused environment, mostly via major banks.
In turn, this could lead to an “army of orphan clients” according to Selby, with those who currently benefit from ongoing advice switching to core advice due to the lower fees and foregoing the benefits of long-term advice, while others are left in the “advice wilderness” by taking one-off transactional advice.
Selby continued: “Given the regulator has been specifically trying to find better solutions for these clients as part of its work on implementation of the Consumer Duty, it would seem incongruous to then facilitate an advice model which is likely to make the problem worse.”
Customer journeys
AJ Bell believes the FCA and the wider industry need to focus efforts on making improvements to guidance which facilitate simpler, more intuitive customer journeys.
“Even if demand for core advice – both from the industry and customers – exceeds our expectations, there will still be millions of savers and investors who either can’t afford to pay for advice or choose not to take it, or both.
“It is therefore critical that policymakers are focused on ensuring both the advised and non-advised parts of the market are able to support people as much as possible. Lack of clarity over the advice/guidance boundary remains a significant challenge in providing useful information to those who choose not to take advice. It is critical the FCA now sets out clearly how it intends to proceed with its promised advice/guidance boundary review, which has the potential to improve outcomes for far more customers than the proposed core advice regime,” he added.
Steven Cameron, pensions director at Aegon, warned that a core advice regime may only appeal to very large firms.
Cameron said: “We welcome the FCA consultation looking at a new ‘simplified’ way of advising customers on investing up to £20,000 of excess cash but we believe changes are needed to current regulatory requirements to deliver value to those with such modest sums to invest.
“This consultation around a core investment advice service has a very specific focus which is more likely to appeal only to the very largest of firms with a large customer base currently with excess cash savings. But the cost savings while the service remains under an ‘advice’ definition are limited.”
Aegon has called upon the FCA to make its consultation the first step in a longer journey towards offering a more personalised form of guidance.
Cameron commented: “Our hope is this is a first step in a longer journey which will include the FCA and Treasury’s holistic review of the advice / guidance boundary, ideally paving the way for regulated firms to offer a more personalised form of guidance. Allowing a guidance service to complement advice could significantly reduce costs while retaining appropriate protection so consumers with smaller sums receive good outcomes.”
Industry body PIMFA has also called upon the FCA to review its proposals, amid concern that introducing limits on investments could hamper its commercial viability.
In a statement, Simon Harrington, head of public affairs at PIMFA, said: “The FCA’s proposals are well intentioned and largely strike the right balance between removing some of the barriers to accessing advice and maintaining the value of supporting individuals to make the right decision, or at least one which is broadly appropriate to their circumstances.
“While we are committed to making these proposals work, we do have concerns about their commercial viability, which are largely a result of what we consider to be the unnecessary restrictions that have been placed on the regime.”
Harrington said that while PIMFA understands the reasons behind the restrictions – namely a desire to keep the service transactional – this ceiling restricts the ability of firms to create a commercially profitable service.
“More broadly, it speaks to a wider concern that we have around these proposals: that it acts as a means to sell ISAs, rather than acting as a service that allows individuals to build wealth with some professional support over the long term.
“These criticisms are not insurmountable in our view. The proposals are welcome but run the very real risk of being undermined by their design. To give them their best chance to succeed, the FCA must review the £20,000 limit and transfer ban as a matter of priority,” he added.
