Issues

Simplified Advice looks like a non-starter as FCA fails to define it adequately.

18 July 2014

The most significant regulatory news of the week was the publication of the FCA’s 56-page Guidance Consultation on retail investment advice flowing from Thematic Review which has looked at non-advised sales and simplified advice.

Not so long ago things were easier for consumers looking for investment advice. Post-RDR they either went to a regulated financial adviser (restricted or full IFA) for fully regulated financial advice with all the protection that this implied. Or they went to an execution-only offering to transact without this safety net – benefitting from some savings of fees for advice in the process.

However there have been growing calls for a regulatory definition of a third-way called ‘Simplified Advice’ where consumers could receive investment information or (dare I see it ‘Guidance’) but they might then go elsewhere to act or transact based on that information. In so doing they would absolve the adviser from responsibility if the investment goes bad? Or so the theory ran…

The main issue with financial advice is the perceived cost of it. Post-RDR it is clear that financial adviser firms have been fine-tuning their business plans to focus much harder on top tier, high net worth customers with in excess of £100,000 of savings to play with. It is this group that can afford to pay IFAs’ fees consistently and have enough at stake to devote the time to a still largely face to face (and thus expensive) advice process.

IFAs have been busily offloading, or deliberately not-serving, lower value customers for two key reasons:
1. They believe that going below this level their customers are less likely to be comfortable about paying their fees (or percentage of value of savings) which they need to run their businesses profitably, and
2. Because they worry that if an ‘advice event’ is seen to happen (as a result of a request for a portfolio review for example) they will immediately have trail commission, linked to the products being reviewed, turned off by the product providers in line with RDR regulation.

All the evidence for this is detailed in Core Data’s latest report. The majority of IFA firms need to keep trail commission fees rolling in as long as possible as they still rely on them for up to a third of their incomes even today. They are banking on having at least some of this trail intact going through 2015 as we get closer to April 2016 sunset clause by which time they will aim to replace all of it.

So will Simplified Advice ride to the rescue, enabling firms to offer ‘Advice Lite’ through semi or fully automated decision-tree-based Simplified Advice – perhaps delivering this through web chats or online eLearning-type environments?

The problem is that having read through the Guidance Consultation most feel that they do not have enough clarity to invest in building this new channel to serve the increasingly un-advised tiers of customers. At the root of the problem is a real question mark over when information provision becomes advice.

The FCA tries indicates ‘if information provided is selected rather than on a balanced basis so that it influences or persuades customers to buy something this may well be regulated advice.’

What is more the suitability requirement remains in place regardless of whether you are giving simplified advice or not and advisers still have to be QCF Level 4 qualified to deliver Simplified Advice.

So it seems the requirements around suitability and compliance remain the same in Simplified Advice as full financial advice. There is no clear definition between the two but surely there must be if adviser firms and indeed D2C platforms can realistically be expected to invest in bringing out their Simplified Advice propositions?

At least this Guidance does not ban ‘Best Buy’ tables in D2C platforms as many speculated it might. However, it is also clear that adviser firms will have to tread very carefully to avoid leading customers by the hand into funds that deliver the highest percentage fees or are outside the risk profile of the customer that buys them, for example.

Looking further into the guts of the GC the line between full and Simplified Advice becomes more blurred still. What seems like generic advice suddenly become regulated advice in circumstances like this one:

‘If, for instance share price information is given in circumstances which suggest that the firm is communicating that it is a good time to sell, then what appears to be the provision of information may, in fact be advice. Providing definitive guidance on whether something is regulated advice depends not only on the facts of the individual case, but also the context.’

In short it is a total mine-field and the fact that so few players have declared an interest in developing a Simplified Advice proposition in the last week since the GC’s publication, says it all.

It is quite clear that the industry is calling for much better definition of Simplified Advice. Let’s hope articulation around how the industry is going to deliver the not unrelated ‘Guaranteed Guidance’ at-retirement (due on Monday 21st July) does a better job of explaining how that is going to be delivered. Will MAS and TPAS deliver it for providers, while providers pay for it via a top-up to existing TPR levies? All will be revealed next week. Watch this space for comment on that soon after it goes public.

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