The UK Government and FCA have published their long-awaited joint policy paper reviewing the boundary between advice and guidance. Although the paper demonstrates their commitment to support and educate consumers, the proposals are still in their developmental stage and will need to be refined. All affected firms should make sure they understand the impact of the proposals on their own business activities, and the advice and guidance market as a whole, both now and in the future.

The Advice Guidance Boundary Review, published on December 8 2023, contains details of three initial proposals to improve the quality and availability of consumer support, including:

• further clarifying the advice-guidance boundary to help authorized firms provide more consumer support within the existing regulatory framework;
• a new “targeted support” regime enabling firms to use limited information to suggest options to people based on consumers with similar circumstances (“people like you”);
• a revised simplified advice regime enabling firms to provide personalized recommendations on a limited range of core investment needs.

In addition, the paper asks whether any other proposals are needed to close the advice gap and encourage the provision of more guidance. Responses to the consultation are requested by February 28th, 2024.

End of the status quo?

Anyone familiar with the FCA’s previous work on increasing access to advice and guidance will be struck by the bolder and more ambitious approach within the paper. Previous semantics around the very existence of an advice gap are gone. The relative caution displayed within the FCA’s ill-fated “core investment advice” consultation paper from earlier this year is also absent.

Instead, we see Economic Secretary to the Treasury Bim Afolami and FCA Executive Director Sarah Pritchard highlighting their collective desire to “accelerate proposals” for “fundamental legislative and regulatory reform” to create “a dynamic, competitive and innovative retail market”. In delivering this, the paper also signposts the UK’s ability to leverage the benefits of the Smarter Regulatory Framework now it is outside European Union.

This shift is understandable. The FCA’s own research suggests many consumers are not getting the support they need to make good decisions within the existing framework. The likelihood of poor outcomes is also increasing, as consumers are tasked with taking ever greater responsibility for their financial futures (for example, following the Pension Freedom reforms). In summary, the risks from allowing the status quo to continue have become too significant to ignore.

Further clarifying the advice-guidance boundary

The first proposal seeks to further clarify the existing advice-guidance boundary. Its purpose is to enable authorised firms to get closer to the boundary so that they can deliver higher-quality guidance to their customers without straying into regulated advice. This is likely to be of most benefit for firms who have been compelled to provide more support to their non-advised consumers – including preventing forms of foreseeable harm – following the implementation of the Consumer Duty.

The nature of the proposal highlights the inherent challenges in making this complex topic simpler for firms. This is demonstrated by the fact that the paper asks for views on whether the solution should be based upon creating yet more guidance or simplifying (for example, refining and reducing) the guidance that exists already.

The latter option is likely to yield the best results, providing a more accessible and predictable way for firms to plot their way forward. Even then, the task is likely to be considerable – or to misquote Mark Twain: “Sorry my perimeter guidance is so long. If I had more time, it would have been shorter”. As a result, any changes are likely to have a more localised impact on the quality of existing guidance services, rather than opening up new routes to market.

While this proposal is the least new and exciting of the three, it is the one that has the potential to assist firms in the near term as any guidance could be consulted upon and enacted more quickly than the other proposals. However, its content (and therefore timeline) will need to take account of the outputs from the other two proposals.

Introducing a new targeted support regime

The second proposal involves the creation of a new targeted support regime, sitting between guidance and regulated advice. This is an area where firms have been struggling for some time to develop compelling, commercial propositions for customers with lower investment amounts and simpler needs. So targeted support offers the potential to fill this key gap.

The new regime would enable firms to use limited personal information about a customer and their circumstances to suggest a course of action likely to be appropriate for people with similar circumstances (“people like you”). There is also the potential for firms to offer this targeted support without explicit charges.

This is the most innovative of the three policy proposals. As a result, the details of how this new activity will function in practice are still somewhat rudimentary at present. The types of support that might be offered, the products and investments covered, the regulatory standards, the charges, the consumer-facing disclosures and the regulatory/legislative changes needed to establish the regime are all to be determined. This means there is an opportunity for the sector to lead the conversation on the design of the new regime.

What isn’t in doubt is that the new targeted support regime is likely to offer significant opportunities to firms, particularly investment platforms, life insurers and retail banks. Firms that are active in the guidance market – and adjacent markets like robo-advice – will also need to pay close attention to the implications for their current and future business models.

Creating a new simplified advice regime

The third proposal aims to introduce a new form of low-cost, transactional, simplified advice on a limited range of products and services. It aims to make it easier for firms to provide affordable advice when consumers have more straightforward needs and smaller sums to invest.

This is the FCA “going back to the drawing board” on simplified advice, after its core investment advice consultation earlier in 2023 was met with a muted response by the industry. The outline proposals for the updated advice regime have been modified in several key areas to try and make simplified advice more attractive commercially. This includes the following:

• Wider scope: The scenarios covered by the new regime have been extended to include new investments into a broader range of wealth accumulation products, as well as advice on existing investments.
• Larger investment amounts: The FCA’s previous plans to limit the amount invested to £20,000 ($25,500) have been shelved, with a proposal to increase the investment upper limit to £85,000 ($108,200).
• More certainty on suitability: There is recognition that the FCA’s previous suitability guidance failed to provide firms with enough regulatory certainty to proceed. To remedy this the paper mentions the potential to include fact-find requirements in Handbook rules, but there is no detail on how existing conduct of business obligations might be reduced.
• Potential for new charging models: A range of fees models are being considered to pay for simplified advice (including those which include cross-subsidization), so long as they do not reintroduce bias or other conflicts of interest.
• Flexibility on training and competence: The concept of a more proportionate (reduced) training and competency framework has been retained. However, the inclusion of a wider range of services means that some advisers might need to be qualified to the same level as for more holistic advice.

Would-be firms are likely to be encouraged by the revised scope of the simplified advice regime. Nevertheless, this is still likely to remain a model where margins are thin and the commercial opportunities are greatest for larger, vertically integrated firms who are able to target existing customers.

Next steps

The content of the paper demonstrates that both the Government and FCA are committed to tackling the longstanding issues preventing consumers from getting the support they need. However, the proposals are still “green” in many places. This means the FCA will need to continue to ensure that the policy which emerges – for each proposal and collectively as a package – will function effectively.

One of the key challenges will be how to describe the services in a way that equips consumers with the information necessary to understand and choose between the different options available. Previous research has indicated that consumers struggle to understand the difference between advice and guidance, so adding targeted support into the mix will make this trickier still.

The changes will also need to integrate within the broader investment market in way that creates a coherent investment services market and avoids clear arbitrage opportunities. It is therefore probably right to think of these proposals as the start of a longer process to make the advice and guidance market function more effectively. Firms need to ensure they understand the potential impacts on their existing business model and stand ready to leverage the opportunities sitting on the near horizon.