The FCA’s continuing failure to clarify regulatory grey areas is preventing providers from developing guidance solutions for consumers, industry experts warn.
The FCA last attempted to explain its views on the boundaries between classes of consumer support in a January paper, which broke down advice offerings into categories of simplified, regulated, limited, focused and generic.
But experts say the definitions remain confusing even to experts 10 months later.
Definitions of advice
EY senior adviser Malcolm Kerr says: “It’s clear the FCA has done everything it feels it can do to explain what these models looks like, whether they are simplified advice, guidance, or advice with a capital A.
“But it’s also clear the people that might be asked to create models, particularly with technology, are not certain.
“There is no doubt in my mind one of the reasons organisations are not creating new advice models, whether they are online advice or guidance, is there is still concern about where the clear blue water is between those particular models.”
RPC partner Robbie Constance says: “You cannot read that FCA paper and think anyone can confidently develop a client-centric proposition based on that.
“Not even software engineers would be able to make it into something meaningful.
“So something like a guidance team might seem like a good idea for a provider, but it’s actually a pretty difficult thing to do.”
Tobin Ashby, a legal director in the insurance division of law firm Pinsent Masons, cites the example of LV=’s recent launch of an online advice service, and says firms are being forced to choose between offering no additional support or providing regulated services.
He says: “We are seeing a lot of people saying they don’t think there’s more scope to give guidance that isn’t regulated advice.
“So rather than trying to do some guidance that doesn’t get into liabilities, they are giving simplified advice and getting advisers involved.”
The January FCA paper forced a number of providers to revise their plans, including insurance giant Aviva. In March, Money Marketing revealed the firm had scrapped plans for a phone-based guidance service following the regulator’s guidance.
Aviva head of financial research John Lawson says: “The FCA paper was sort of helpful, but it also left a lot of grey areas because it was quite complicated and it introduced a large number of different types of advice.”
He adds while Aviva would like to provide more support to customers, it is prevented from doing so because it remains unclear whether such efforts would qualify as advice, and therefore incur the liabilities associated. He says “For an IFA to offer financial advice to an average, run-of themill customer doesn’t stack up. And Pension Wise gives them guidance but it all leaves people feeling short-changed because nobody will tell them what to do.
“Most firms are asking the same questions as we are. We can’t afford not to charge, they can’t afford to pay, so why can’t we just help those people on a best endeavours basis?
“For example, if you don’t have much saved, your fixed expenditures are £10,000, and you have £7,000 to £8,000 coming in from the state pension, then maybe you should be looking at a guaranteed income option.
“That’s helping the customer to the right decisions and answering some simple questions and helping them navigate that path to the right solution. We could do that.”
Royal London pensions specialist Fiona Tait says the waters have been muddy since Chancellor George Osborne declared all pension savers would be able to access “free advice” in the March 2014 Budget – a promise later watered down to “guidance” by the Treasury.
She says: “What we haven’t done is clear it up in any way, and that has taken longer than it should have.
“At the moment, there isn’t any clarity from the regulator, so everyone that is working in the profession is following the Financial Advice Market Review, and hoping something might come out.”
The simplification game
The FAMR being undertaken by the Treasury and the FCA is due to be completed ahead of next year’s Budget.
LV= head of retirement propositions Phil Brown says he wants to see the Government and the regulator report back with simpler definitions for what does, and does not, constitute financial advice.
Although LV= launched its own online advice offering earlier this year, Brown says consumers still do not understand any of the distinctions provided by the regulator in its January paper.
He says: “The consumer perception of advice and the services you might actually provide are totally different things.
“If it’s simplified down to either you receive advice or not, then you can start to talk about what kind of service you can provide.
“At most we should have groups of advice, guidance and information. Because we are coming at it from the consumer perspective, what is und-erstandable for them?”
Constance agrees: “The idea that any compliance or legal team within a firm can digest this and work out their proposition is tough, but the idea that a customer would understand what they are getting is laughable.”
AJ Bell marketing director Billy Mackay warns ignoring the need to be able to explain advice to all sides risks further confusing both providers and consumers. He says: “We need to take a fundamental step back. Toying around is not the answer, and in any journey, if you start in the wrong place, you are going to end up in the wrong place.”
‘Absurd’ FCA sandbox
Meanwhile, the FCA has been criticised for failing to involve the Financial Ombudsman Service in the launch of the so-called “regulatory sandbox” earlier this month.
The sandbox will open in spring next year and will allow unauthorised firms to test out new propositions by granting them authorisation with restrictions. The restrictions can later be lifted once the firm is able to meet full requirements.
For authorised firms, the FCA says it would issue “no enforcement action letters”.
These would state no enforcement action will be taken against testing activities where the FCA is satisfied the activities do not breach its requirements or harm its objectives.
The regulator adds it would be appropriate for it to reserve the right to end a trial, and firms would still have a liability towards their customers.
The FCA says there are a number of options to ensure consumer protection, including requiring customers to give consent to be included in a trial. The regulator’s preferred option would see firms agree on disclosure, protection and compensation requirements on a case-by-case basis.
However, a FOS spokeswoman says it will have little role in the sandbox plans.
She says: “The regulatory sandbox is an FCA initiative and we continue to support and help the FCA with this.”
Constance describes the FOS as “the elephant in the room” in the project. He says: “No one has persuaded the FOS to accept different standards and different liability risks.”
“It’s absurd. There’s no suggestion that the FOS is going to go easy on firms participating in the sandbox, so I don’t really see why they would take on that risk.”
Kerr adds that for many firms, the prospect of spending money to develop an offering for the sandbox will remain unappealing if the FCA is not able to tell them ahead of time what it considers fit for purpose.
He says: “It’s all very well being told you can play in the sandbox, but it would be better if they really were clear. Wouldn’t it be more sensible for the FCA to have their own sandbox and try these things out themselves, so that the industry can be told what good looks like, as opposed to bad?”
Adviser views
Wingate Financial Planning director Allistair Cunningham says: “There is a potential grey area but from our perspective we already give full advice. If someone does not want advice and we believe in a world of freedom and choice at some point we need to move to a world where people take responsibility for their actions. The problem is the line is blurred by terms like simplified advice. To me these things are fairly black and white, but the world is not always like that.”
Dobson and Hodge director Paul Stocks says: “When you look at pension freedoms there has to be clarity for consumers as to what they are getting in terms of advice, guidance, independent and different types of restricted. Ros Altmann has brought up this issue that people might think they are ringing providers and get advice when they are not. Perhaps we should have an FCA disclosure document detailing what the client was getting and clients have to sign it, then everyone would know where they are.”
The FCA’s advice definitions
Full advice: Full regulated advice which may be independent or restricted and will consider the full range of the client’s needs, including their debt and protection needs.
Focused advice: A deliberate limiting of the range of personal recommendations sought by the client to suit their particular needs, for example, to seek a recommendation on buying an Isa.
Simplified advice: Provision of personal recommendations where the firm sets out the limited nature of the service either face-to-face, electronically or by telephone.
Execution only (without a personal recommendation): Execution and/or reception of and transmission of orders for products.
Expert view
FCA ‘sandbox’ plans must engage with reality
What matters is what something is, not what it is called. The FCA and the industry should remember this when it comes to advice.
The consumer research I saw as a regulator always told the same story – consumers make a clear-cut distinction between information, which is factual, and advice, which involves an element of opinion or persuasion. So the proliferation of descriptions now being applied to advice probably have more to do with sections of the industry trying to de-risk the advice process for themselves rather than reflecting any genuine consumer perception of differences in types of advice.
Although the current FCA rules on advice are a little more elaborate – probably because of Mifid – than those first introduced 30 years ago, they are still flexible and allow advice to be delivered in different ways. For example, bespoke rules on basic advice were not needed. A specific set of rules was introduced – and the FOS made a statement about its approach to complaints – simply to give firms a safe harbour.
Some firms seem to have Humpty Dumpty approach to advice – “When I use a word it means just what I choose it to mean.” An approach that fits with the FCA’s infantile description of a “sandbox”.
By all means let the FCA and firms play in their sandbox but they need to remember that others need to be engaged with the process. How will the PII market react? What is going to be the approach of the FOS?
Above all else what do consumers themselves think? Do they feel they are getting an advice service that addresses their needs or are they being short-changed?
There could still be tears before bedtime – any new advice model will still have to comply with Mifid.
David Severn is an independent regulatory consultant and former head of retail policy at the FSA
The FCA paper is complicated and does need some clarification. However, it is clear that focused and simplified advice must be delivered by a qualified adviser, must deliver on suitability and will be covered by FSCS. As such, advisers are key to delivering more affordable regulated advice solutions – and that’s exactly how it should be. We are alreday seeing focused advice solutions starting from as little as £150. Some advisers will not be interested in offering these services but more need to be empowered to do so. Any ‘guidance’ service or ‘robo-advice’ can be no substitute for interaction with an expert!
All this talk about “stifling innovation” is becoming an ongoing PITA. Consider the definition of innovate: make changes to something established, especially by introducing new methods, ideas, or products. Do we really need forever to be reinventing the wheel, introducing yet more new methods and products and dreaming up ever more “new ideas”? I really don’t think we do. Look at the ghastly quagmire into which endless regulatory “innovation” has got us. We need a break from it all, a slowing of the pace of endless change, change, change. What’s it achieving apart from consumer confusion, lack of engagement and increasing the costs of providing advice?
In the Tax Considerations appendix to my suitability reports on pension matters, I now have to make reference not merely to the current rules but also to what they were until just recently (in case the client says: Yes, but…) and what they’re going to be from next April, which is frankly bloody absurd.
Instead of this endless maelstrom of change, change, change, the industry (not to mention the government) should be looking for ways to refine and simplify what we already have. Maybe the Treasury-led Review of (Over)regulation (I just hate the term FAMR) will get us some way towards what should be its primary objective, though there are likely to be so many people saying: Yes, but… that I’m not entirely confident. Somebody needs to wield a big axe and say: This ain’t gonna be perfect and you (mainly regulators) may not like it but somebody has to prune the tree and if you aren’t going to do it, we will.
I think Julian Stevens makes some very important points. Regulation (pension and tax changes as well) has become a perpetual motion machine. It consumes a lot of money on the part of the regulator, it wastes a lot of the management time of firms that they might better spend serving clients, it creates confusion for consumers. So long as the system is reasonably fit for purpose why bother tinkering with it. Many years ago I put to Howard Davies and John Tiner the idea that the FSA might stop own initiative policy changes and instead do just what was necessary to implement EU measures. Perhaps the FCA Board should consider this.