Advice Guidance Boundary Review: Early thinking on how to fix the advice gap

What?

The FCA and HM Treasury (HMT) have published a joint discussion paper, 'Advice Guidance Boundary Review – proposals for closing the advice gap' (DP23/5). DP23/5 sets out three high-level proposals to close the advice gap:

(1) Further clarifying the boundary, building on the FCA's guidance on the boundary published in August 2023.

(2) A new 'Targeted Support' regulatory framework that enables firms to use limited information to suggest products or courses of action appropriate to a person in similar circumstances.

(3) A Simplified Advice Regime enabling firms to give simplified advice taking into account only relevant information about a specific consumer need.

DP23/5 is also asking for thoughts on whether there are any other proposals that could help close the advice gap. The FCA and HMT are jointly conducting the review so that the legislative and regulatory regimes can be considered holistically. These proposals, explored in more detail below, reflect 'early thinking' and are expected to evolve following feedback.

Responses to DP23/5 are requested by 28 February 2024.

Why?

As part of the Edinburgh Reforms announced in December 2022 (see our briefing here), the Government committed to working with the FCA to close the advice gap and examine the boundary between regulated financial advice and financial guidance. The Government and the FCA are hoping to create 'a system that ensures consumers get the help they want, at a time they need it and at a cost that is affordable'. The Review also provides an opportunity to rethink the way support is delivered to consumers and take advantage of new and emerging technologies to enhance consumer experiences and outcomes.

Scope

The Review focuses on the boundary between financial advice and guidance available for retail investments and pensions. Within the investments and pensions sectors, the Review covers both accumulating assets (including General Investment Accounts (GIAs), Individual Savings Accounts (ISAs) and pensions wrappers) and decumulating assets (including pensions decumulation). General insurance, mortgages and debt advice are out of scope. The Review will also not include advising on transferring out of a DB scheme or giving up other safeguarded pension benefits.

The proposals

The Government and the FCA envisage that the proposals could potentially work together and that they will sit alongside the existing financial support services. The three proposals, including some key features, are considered further below.

Proposal 1: Further clarifying the boundary – the FCA/HMT are exploring whether further guidance or simplifying existing guidance, and building on the August 2023 boundary clarification document, would help firms to provide consumers with greater levels of support by giving them more confidence to operate closer to the boundary. The FCA could for example:

Use non-Handbook and Perimeter guidance to set out scenarios of consumer support that would not constitute a personal recommendation. In appropriate cases, they could also consider rules mandating specific actions.
Simplify existing guidance to give greater certainty to firms that they are not giving a personal recommendation.

Proposal 2: Targeted support (not 'advice') – The FCA/HMT see this as a key new proposal to help close the advice gap. This option explores a purported new regulatory framework which enables firms to broaden the support they can provide to consumers. The support could be offered without explicit charges (ie without upfront fees specifically and exclusively relating to the service provision of targeted support), based on limited information, and would enable firms to suggest products or courses of action based on a target market the consumer has been identified as belonging to, rather than fully individualised support.

• Suggestions, which might relate to existing or new products, would be based on the needs, characteristics and objectives of the identified target market (ie ‘people like you’).
• Who? DP23/5 asks whether there should be restrictions on the types of firms allowed to provide targeted support. The paper suggests that targeted support may be an offering predominantly taken up by product manufacturers which are likely to be larger, more established, vertically integrated firms. As it is important that consumers understand targeted support is different from advice, DP23/5 points out that it is not clear whether such a service could be provided by a financial advice firm. For these firms, the simplified advice option may be more appropriate.
• What? It is proposed that there would be no product, investment range or monetary value limits (beyond existing limits) on targeted support.
• No explicit charges - As some consumers either cannot afford or are not willing to pay for financial advice, DP23/5 explores how firms might be permitted to offer targeted support without explicit charges and how firms can recover their costs. Remuneration via commission payments would still be prohibited, but the Government and the FCA are considering permitting limited forms of cross-subsidisation, subject to the Consumer Duty and the need to focus on consumer outcomes.
• Disclosure requirements would need to be in place to ensure customers understand the nature, scope and limitations of targeted support, as well as manage any conflicts of interest arising from enabling targeted support to not be subject to explicit charges.

We think that much will depend on the eventual detail here. It is arguable that the adoption of a 'targeted support' approach would be achievable simply by providing further guidance on the existing advice perimeter (per Proposal 1); but it would seem that the FCA sees 'targeted support' as something apart from that.

Proposal 3: Simplified advice – This proposal may be the one that represents the most significant change. It is aimed at enabling firms to better support consumers who would like to receive a personal recommendation when making a financial decision but for whom the more comprehensive support provided by 'holistic' advice may not be cost-effective.

• Context - The FCA has tried to support simplified advice propositions in the past:
  • FCA17/8 'Streamlined Advice' which limited simplified advice propositions to more accessible, more flexible, and less risky products; and
  • CP22/24 'Core Investment Advice Regime' which the FCA was consulting on at the time of the Edinburgh Reforms announcement. That proposed a regime applicable only to investments into mainstream products within a new Stocks and Shares (S&S) ISA. In August 2023, in light of 'limited support from the industry for the initial set of proposals consulted on', the FCA decided to roll the developments on the new core investment advice into the broader review of the advice/guidance boundary.
• Simplified advice v targeted support and holistic advice - Unlike targeted support, simplified advice would result in a recommendation that is personalised to an individual consumer's circumstances. Simplified advice is envisaged as a one-off service whereby the firm would take into account only relevant information about a specific consumer need. The idea is that a new simplified advice regime could involve different standards than are currently applied to holistic advice and would be suitable for consumers with simpler needs.
• Types of service – DP23/5 asks whether simplified advice should allow firms to provide repeated instances of transactional advice to a customer but exclude ongoing and periodic review services.
• Charges – DP23/5 is looking for suggestions for how to make it easier for consumers to pay for simplified advice. The Government and the FCA are open to exploring the range of revenue models firms could use to be remunerated for simplified advice, but which do not undermine the changes made as part of the Retail Distribution Review (RDR).
• Who? - DP23/5 anticipates that simplified advice might be offered by financial advice firms of all sizes who would like to service additional consumers. It might also be offered by investment platforms, retail banks or other product manufacturers who wish to develop simplified advice propositions, in addition to, or to complement their current product offerings.
• What? - Feedback to CP22/24 suggested that the product range of the Core Investment Advice Regime was too narrow and the investment limit (£20,000) too low to attract a sufficient number of consumers which meant it would not be feasible for firms to deliver the proposed simplified advice service profitably. DP23/5 explores whether a cap of £85,000 is the correct investment limit for simplified advice and whether wealth accumulation products, but not pension decumulation, should be within scope of the regime.
• Training and competence (T&C) – A proportionate T&C framework is proposed for simplified advice where firms wish only to advice on a single area or an individual product. Where firms wish to provide simplified advice on more than one product type, they should comply with the same T&C standards as for holistic financial advice.

Other points to note

• Other regulatory reforms may impact the review, including ongoing work on ISA simplification, the Compensation Framework Review, the Retirement Income Advice Review, as well as various other pensions-related initiatives such as the pensions dashboards and pensions engagement trials. As the FCA incorporates relevant elements of retained EU law into its handbook as part of the Smarter Regulatory Framework (SRF), the FCA will consider whether there are other aspects of FCA rules that may need to change. For example, the repeal of PRIIPs regulation as part of the SRF, and the new disclosure framework, will be relevant to Advice Boundary Review. The Government will also consider whether changes to the RAO are required to facilitate the proposed regimes.
  Any new solution needs to work within the existing ecosystem of support for consumers. The FCA/HMT have committed to working closely with other organisations, eg the Money and Pensions Service (MaPS), to ensure a join-up approach.
• Firms are being asked to consider whether there should be amendments to the Dispute Resolution sourcebook to enable them to provide different levels of support. Whether FSCS protection should include the three proposals in DP23/5 is also being considered.
• HMT/FCA would like to hear from firms where they feel they are unable to provide consumer support, particularly in light of the proposals, because of the Privacy and Electronic Communications Regulations (PECR) direct marketing rules or other data protection rules.
• HMT/FCA would like to hear from pension trustees who may wish to give greater support to consumers in a way that does not cross into regulated advice.