As we enter the new year with the trade press awash with comment on robo-advice, it seems like a good time to take another look at the Financial Advice Market Review paper released in August, on which the Treasury and the FCA are due to report in March.
The FAMR is a logical and some would say predictable follow on from the RDR. While RDR has increased professionalism it has also reduced access to advice by increasing cost and the barriers to entry in the advice market, which has led to an advice gap.
The FAMR is an attempt to at least ask the right questions about the advice gap to provide at least some ideas, if not answers. It also ties in well with the FCA’s Project Innovate and, more recently, the “regulatory sandbox”, with the FCA appearing to want to demonstrate it is not inflexible and narrow in its thinking.
The FAMR call for input paper certainly appeared to ask many of the right questions. Many consumers cannot afford a full face-to-face advice experience, do not have sufficient assets or requirements of sufficient complexity to justify that process and/or simply do not want such advice.
The perception is that while certain small pockets of consumers may genuinely not need or benefit from advice, there is a large swathe in the middle ground that could benefit but who do not have access to advice due to one or more barriers.
One clear reason for this, which may have to be addressed if the FAMR is to succeed by any measure, is the definition of “advice” under the current regulatory regime. The FAMR paper openly acknowledges that “basic advice” has broadly failed, leaving us with what amounts to an “all or nothing” definition.
Similarly the FSA/FCA’s efforts to clarify the meaning of “simplified advice” have not provided firms with sufficient certainty to base new business models and methods of working on a simplified advice model. Rightly or wrongly, most firms still perceive that any “advice process” will be judged on a gold standard of full compliance with the full FCA Handbook.
The FCA has at least acknowledged this issue. Some potential solutions have also been mooted, including a “safe harbour” for advisers, bespoke rules for different types of advice (e.g. robo-advice), explicitly identifying areas where consumers can be asked to take more responsibility for financial decisions and reducing potential liability for advisers (e.g. introducing a longstop).
The thread running through most of the potential solutions identified is certainty. This is also a key theme for the adviser community. If the regulator wants firms to innovate and develop new solutions, it must accept firms will only do so where they consider they have a reasonable amount of certainty about the regulatory outcomes that may result.
This is an issue the regulators have historically struggled with. Understandably, they do not want to do anything that could be perceived as reducing protection for consumers. The view of many firms is that consumers currently enjoy a level of protection so great that any complaint automatically puts the firm on the back foot and requires them to prove they did nothing wrong. To an extent the regulatory system could be said to encourage that approach, as so much attention is given at the outset to what may go wrong.
While it is perhaps understandable how we have arrived at this place, given some of the misselling scandals of the past, it does make it very difficult for the regulator to take any steps that may be perceived as reducing the level of “protection” currently enjoyed by consumers.
So although the FAMR correctly raises many of the key issues, some real bravery may be required on the part of the regulator to create an environment that will allow and encourage firms to implement solutions to those issues. It would be a radical shift for the regulator to adopt an approach that results in a genuine shift in the regulatory context in which firms operate. The RDR was radical, and most would say needed, to address key issues in the advice sector.
The approach needed here is one that would shift the pendulum the other way in certain specified situations, providing the certainty and clarity needed for firms to genuinely innovate. It remains to be seen if this is a nettle that the regulator is ready, and prepared, to grasp.
Alan Hughes is partner at Foot Anstey LLP