The asset management and savings industry has offered its backing to the UK regulator, the Financial Conduct Authority, which wants the law governing the provision of financial advice to consumers tightened up and clarified.
The role of independent financial advisers in recommending investment funds and other products to consumers has been under scrutiny since August, when the FCA and the Treasury began a joint review of the industry, known as the Financial Advice Market Review or FAMR.
The review, which concluded on March 14, made 28 policy recommendations; many of which are directed at the FCA itself. However, one change that will require the Treasury to rewrite the law is to amend the definition of regulated financial advice.
Pete Horrell, UK managing director at Fidelity International, said: “Putting more thinking to a better definition of financial advice and creating clarity on what constitutes generic assistance and that of a personal recommendation is a great step forward.”
The review calls for this to be tightened up, so that advice refers only to “personal recommendations” – tailored by the adviser to the needs of a specific client; the current definition can include, for example, a bulletin circulated generally to clients advising them to buy shares. The FAMR review points out the narrowing of the definition would bring it into line with European regulation.
The FCA itself should follow up with new guidelines for firms that offer various forms of “guidance” – information that does not amount to regulated advice – clarifying how it is defined.
In the same way, it would also follow up with guidelines for firms that offer “streamlined advice”. This covers firms that make recommendations in only one particular product area; rather than fully assessing a client’s complete financial circumstances.
The industry generally welcomed the moves. Jonathan Lipkin, director of public policy at the Investment Association, the fund managers’ trade body, said the current definitions of advice and guidance were “confusing even for the industry”, and that FAMR’s plan offered “an opportunity to develop a much clearer framework”.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said the FAMR plan “should allow firms more latitude to deliver useful guidance without having to charge an advisory fee, or worry about inadvertently straying into giving personalised advice”. He said: “Overall this is good news for investors; over time they should find the investment industry more accessible.”
McPhail sounded a note of warning on the FCA’s ideas for “streamlined advice”, however: “Where regulated advice is given it should adhere to high standards; there is a risk that these proposals could undermine this extremely important principle and allow poor practices to creep back into the industry.”
The FAMR was begun in the aftermath of the government’s changes to pensions legislation, which meant consumers no longer have to use pension savings to buy annuities. This came with a promise of free “guidance”, provided by the government, on what other products are available.
The confusion between this “guidance”, and the business of providing regulated financial advice – product recommendations – was illustrated when Chancellor of the Exchequer George Osborne mistakenly referred to “free financial advice” when launching the new policy.
Graham Vidler, the director of external affairs at the Pensions and Lifetime Savings Association, said the review was “right” to recommend “clarifying the regulatory boundary between guidance and advice”, but added that “advice is part, but only part, of the solution given that there is significant resistance among savers to seek financial advice”.
Isobel Langton, the chief executive of Royal London Intermediary, part of Royal London, said: “It is vital for the success of the sweeping changes proposed under FAMR that the sources of ‘streamlined’ advice are impartial and distinct from product providers.”
The FAMR also contained some potential good news for financial technology providers. It recommended that the FCA’s “Project Innovate” department, which encourages technological innovation in financial advice, should also have a new Advice Unit, to help firms wishing to develop “automated advice models”, known as robo-advisory services.
It also called on the Treasury to “challenge the industry” to develop a new service known as a Pensions Dashboard by 2019. This would be a “consumer-friendly digital interface that would display information about all of an individual’s pension savings in one place”, “retrieved directly from providers”, without requiring “lengthy data input by the individual”.
Langton, of Royal London, welcomed the idea but said: “Rather than challenging ‘the industry’ to deliver a pensions dashboard, government and regulators should be collaborating with providers to deliver a viable dashboard.”