What is the aim of the Advice Guidance Boundary Review?

Discussion Paper 23/5 (DP23/5) ‘Advice Guidance Boundary Review – proposals for closing the advice gap’ (the Review) considers the current regulatory barriers that have prevented the financial advice industry from providing more support to financial services consumers.  This has resulted in a large majority of people in the UK not accessing regulated finance advice to help them make financial decisions.  The aim of the Review is to ensure that a much broader range of consumers are empowered to proactively manage their finances. 

The Review builds on previous government and FCA work to improve support for consumers. The Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR) enhanced the quality of financial advice and whilst these reviews provided greater certainty for firms in some areas, uncertainty around the advice guidance boundary was one of the issues raised in the original FAMR work. As a result, the government amended the definition of regulated advice in the Regulated Activities Order (RAO), distinguishing regulated advice that is a personal recommendation from other forms of advice. The FCA published perimeter guidance to help firms understand the boundary between these two forms of advice (PERG 8 Annex 1). Despite this previous work, some firms are still finding it difficult to develop new services to meet the needs of consumers.  The Review sets out 3 initial proposals for FCA-authorised firms which will sit alongside existing support and are aimed at improving the current levels of support consumers have when making financial decisions.

The Review aims to design a regulatory system where commercially viable, high quality models of support can emerge and on this basis, firms and consumers will be expected to manage risk, rather than eliminate it. This means that firms should not be overly reticent to offer support because they are hesitant to come too close to the boundary or due to an overly cautious risk appetite. For consumers, the Review sets out that whilst any financial decision carries an element of risk, there are potentially higher risks to not investing such as the value of savings held in cash being eroded by inflation.

What is meant by an ‘advice gap’?

The Review details that a lack of appropriate financial advice may be leading consumers to make decisions that are not in their best interests.  The overall picture is that consumers can find it difficult identifying that they need support and when they do, their needs are not being fully met. Whilst not everyone will want or need support, many consumers could be missing out on the value support can provide – a situation commonly known as the ‘advice gap’. In practice there is not a single advice gap representing one problem, but multiple gaps covering overlapping problems. Throughout the Review, the term ‘advice gap’ is used to describe different types of financial support, including both financial advice and guidance. A combination of factors – both on the demand and supply sides – can help explain why people don’t seek or receive services that might help them to consider their investments.

The Review sets out the following range of non-exhaustive drivers of the advice gap which it aims to address (the FCA acknowledges that there may be a range of other drivers such as financial literacy but these are outside of the scope of the Review).

• A consumer wants advice but may be unwilling to pay for it or might be reluctant to pay for professional advice without being confident about its quality or value. 
• A consumer wants advice but may be unable to afford it.
• A consumer who has never invested before may need support to make an investment decision but is unsure where to start.
• Firms want to warn a retail customer of potential harms but may perceive that they would need to give advice to do so.

Whilst the government pursues the broader reforms set out in the Review, the FCA issued a clarification for firms in August 2023 setting out practical examples of the types of activity that firms can provide without crossing into “advice” or a personal recommendation under the current rulebook with the aim of helping firms get closer to the current advice guidance boundary.

What types of financial advice are currently available to consumers?

The UK market for financial support services focuses either on giving holistic advice or factual information and guidance.

Holistic advice

Holistic advice is where an adviser considers a consumer’s overall financial circumstances and objectives before making recommendations to meet their requirements. This usually involves face-to-face meetings with customers to understand their risk appetite, financial objectives, and their financial position (fact finding). Charges for advice are generally made on either an hourly basis or as a percentage of assets under management. Holistic advice is a regulated activity so any firm wishing to provide holistic advice would need to be or become FCA authorised, obtain the regulatory permission to undertake the regulated activity of advising on investments and meet the FCA’s requirements for firms undertaking this activity.

Information and guidance

Consumers use a broad range of information and guidance from not-for-profit, public sector providers and the commercial sector to help them make financial decisions. These services do not make a personal recommendation. Instead, they typically give generic, factual information. Many FCA-authorised firms, including banks, asset managers, life insurers and pension providers, offer this type of non-advised support. Although suitability rules do not apply to non-advised sales, the FCA’s high-level standards including the fair, clear and not misleading rule in COBS 4.2, as well as the Consumer Duty, do apply. These are important consumer protections as consumers who are not getting advice need good quality information on which to base their decisions. Free impartial guidance on money and pensions is also provided by other bodies, such as Citizens Advice.

In addition, there have been some positive trends in the use of technology and innovation among advice firms, such as attempts to introduce more simplified advice propositions (including automated or ‘robo’-led models), but the Review notes that they have not yet been able to attract large numbers of consumers. Firms have questioned the economic viability of providing advice to mass market consumers, especially where there is a human element involved, given the extensive requirements around initial customer fact find, adviser qualifications and explicit adviser charging (RDR/FAMR Evaluation, 2020).

Initial proposals to close the advice gap

The Review sets out the following 3 initial proposals for FCA-authorised firms, which will sit alongside existing support to give consumers greater levels of support when making financial decisions. Taken together, these proposals are intended to smooth the cliff edge between holistic advice and information and guidance and create a continuum of support that would help many more consumers to make informed investment and pensions decisions.

Proposal 1 –Further clarifying the boundary

The Review proposes to further clarify the advice guidance boundary.  This would provide FCA-authorised firms with greater certainty that they can give more support to consumers without providing a personal recommendation under the existing framework. The Review will continue to explore whether further guidance or simplifying existing guidance would help firms to provide consumers with greater levels of support by giving them more confidence to operate closer to the boundary. In appropriate cases the Review proposes that it could also consider rules mandating specific actions.

Proposal 2 - Targeted support

The second option explores a new regulatory framework which enables firms to broaden the support they can provide to consumers. The support could be offered without explicit charges (i.e., 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.

Proposal 3 - Simplified advice

In November 2022, the FCA set out proposals for a simplified advice regime ‘Broadening access to financial advice for mainstream investments’ (CP22/24). It aimed to provide straightforward, one-off investment advice to consumers with less complex needs. Feedback to the consultation suggested support for a core investment advice regime, but limited support for the specific proposals. This was partly due to firms suggesting there were commercial barriers to implementing the proposed regime. Building on the feedback from CP22/24, the Review is considering a simplified form of advice that enables firms to support consumers with simpler needs and smaller sums to invest, and to do so in a commercially viable way. This proposal is aimed at enabling firms to better support those consumers who want 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.

Next steps

The Review sets out that the three initial proposals to address the advice gap are high-level at this stage and reflect early thinking.  Responses to DP 23/5 are due by 28 February 2024.   Alongside the Review, the FCA is carrying out a series of forums, roundtables and bilateral meetings to obtain further feedback on the proposals.   It will also seek to conduct further consumer research and stakeholder engagement to inform any ongoing policy development. We will be following further developments on this key topic so please get in touch if you would like to discuss further.