Posted: 18th April 2016
This article was first published by the ABI
Although the Financial Advice Market Review (FAMR) asserts that consumers need the industry to do more in the advice space, there are a number of factors that come into play to demonstrate what a challenge this is, including:
- Lack of consumer understanding over the benefits of advice
- How to bridge the ‘advice gap’ and serve consumers with lower amounts to invest or with simple needs at a price they are willing to pay
- How to increase consumer trust and confidence in financial services
- How to tackle other barriers which prevent consumers from seeking advice in the first place
These factors ask deep questions of the advice market, and now, the FAMR gives us insight into how the regulator expects firms to stimulate change. Many of the recommendations coming out of the FAMR are designed to make the landscape easier to navigate for firms, but what should this journey look like? Ahead of regulatory and legislative changes, is there anything firms should be thinking about now?
DELIVERING ADVICE AT AN APPROPRIATE COST
Here are three factors for firms’ consideration which are growing within the industry:
‘Robo-advice’ is the subject of continuing debate; with some claiming that consumers are soon to be engaged with an entirely technology-based advice proposition. For firms, technology has the potential to play a major role in driving down the costs of supplying advice, making it more affordable for consumers.
However, the reality of this new technology is that the nuances of the long-term outcomes it delivers are unproven. This is worrying when solutions must work for a wide range of customers across a wide range of circumstances.
This is certainly not an attempt to play down the role of technology, but rather to call attention to the need to transition from a human process to a more technological one while ensuring oversight and governance is effective and outcomes are monitored carefully.
Technology will eventually be central to advice, of that there is no doubt, however, in today’s industry, recommendations made by technology should be closely monitored by experts.
DEVELOPING SIMPLIFIED ADVICE MODELS
The FAMR found that a barrier to providing advice to consumers with simpler needs is uncertainty on what distinguishes regulated advice from more general forms of guidance. Understanding the definitions and liabilities associated with different advice types is a challenge for firms.
As discussion on the topic of advice continues, we are likely to see more clarity in this space, but that said, it is possible right now to begin to formulate your approach to each definition of advice or guidance. Consider the regulatory understanding of your firm in this area. Are you thinking about the sort of expertise you might need to help you define your approach for each of these advice definitions?
Firms engaging in this thinking now can ensure the level of customer risk profiling, asset allocation, investment and fund analysis (and more) is proportional and therefore operationally efficient.
The FAMR asserts that “limited confidence in engaging with financial issues, and a lack of trust following past instances of mis-selling” contribute to a lack of demand for advice. Here, firms’ culture can contribute to solving the issue.
To this end, the implications of FAMR must be fully realised at the top level of every firm. The decision to refocus on advice within your firm is something that can be benefited immeasurably by the endorsement and strategic decisions of a firm’s board.
How you distribute your products and ensure they cater for your target market is a signifier of your firm’s culture, and this is no different in advice. Does advice provision come up in board meetings? Is it discussed in terms of simply meeting regulatory requirements, or in terms of gaining a real competitive advantage?
If firms can successfully navigate the changing advice landscape now, then they will stand themselves in good stead to gain a commercial advantage over those firms who are a little slower on the uptake.
THE IMPORTANCE OF CONSUMER ENGAGEMENT
Not only will firms need to come to market to provide solutions to the problem of the advice gap, but they’ll also need to ensure consumer engagement increases as those solutions become available. This is what will tackle poor investment outcomes while ensuring firms’ commerciality.
This isn’t just limited to the older population, either. How might a 25 year old today feel about advice; the contents of it; the benefits of it? For many, financial decisions made throughout their lifetime have not been accompanied by the help of a qualified professional, and so seeking advice is less likely to come to mind.
This serves to show that firms have work to do to re-instil advice in the industry; that is to say, encouraging consumers to consider seeking advice for certain financial decisions by raising awareness of the benefits and availability of advice.
This will, of course, be a process of evolution; firms will innovate and regulatory developments will continue.
Firms may feel they require a little more clarity around advice, guidance and related liabilities in order to go forth with consumer engagement activity in confidence. Continuing to monitor the progress of the various recommendations made by the FAMR is the best course of action.
A BENEFICIAL JOURNEY FOR THE INDUSTRY
What’s on offer to firms navigating the changing advice landscape successfully? Improved customer advocacy, a more powerful brand identity, other reputational benefits and the mitigation of future remediation costs.
Some FAMR recommendations that should be monitored closely include:
- A potential Treasury consultation on amending the definition of regulated advice in the existing Regulated Activities Order (RAO), in line with the EU definition set out in MiFID II
- FCA and The Pensions Regulator (TPR) potentially developing and promoting a new factsheet to set out what help employers and trustees can provide on financial matters without being subject to regulation
- Whether the ombudsman consider undertaking regular ‘best practice’ roundtables with industry and trade bodies
- The recommendation that the Treasury should explore options to allow consumers to access a small part of their pension pot before the normal minimum pension age to redeem against the cost of pre-retirement advice
- The introduction of a pensions dashboard, which will present consumers with a single, consolidated view of all of all of their retirement savings (this is likely to promote consumer engagement)
As well as this, the FCA will be initiating a ‘regulatory sandbox’ later in 2016, and firms should be thinking about the sorts of approaches they can test within this arena.
FCA focus on advice is a logical step for an industry aiming to achieve consistently good customer outcomes. It’s true that the best way to address an issue is to understand the root cause of it, and, of course, ensuring consumers are advised on the right financial journey for their needs can serve to prevent future detriment, and therefore costs to firms.
It is possible to use upcoming regulatory change in this area as a springboard to improve the affordability and accessibility of advice, which will result in stronger relationships being formed between financial services firms and their customers – the end result being an improved level of protection for consumers and firms alike.
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