We welcomed the call for input into the so-called ‘financial advice gap’ in the UK – concerns that large numbers of consumers are unable (or unwilling) to access good quality, appropriate financial advice. Good advice is critical for promoting financial inclusion, financial resilience and security amongst households – particularly lower-medium income households which are the focus of our work at the Centre. But, it is important that we understand the real causes of the advice gap. Claims that over-regulation is the primary cause of the advice gap are wrong or disingenuous and used to try to reduce much needed consumer protection. Remedies based on false analysis would exacerbate rather than improve the situation.
A more accurate assessment is that robust, better regulation has exposed a long established advice gap. Of course, many lower-medium income consumers were ‘advised’ on and sold insurance, investment and personal pension products in the past. But, as we now know from the litany of misselling scandals, these products were all too often unsuitable and represented poor value for consumers due to high charges and commission payments to advisers/ intermediaries. In effect, consumers were cross-subsidising the sale and distribution of these poor value products.
Therefore, it is important not just to think of access to advice per se but whether it produces the right outcomes for consumers. It would be easy to close the advice gap if we just allowed the industry to go back to advising on and selling poor value, unsuitable products. But, of course, that would be unacceptable.
The real reasons for the advice gap in our view are:
- large numbers of consumers simply cannot afford to save and invest, or pay for for-profit advice; and
- large numbers of consumers are ‘underserved’ by the financial services industry because the industry is still too inefficient to meet their needs.
In other words, it’s all about the economics of access and distribution. Reducing consumer protection to encourage the industry to serve more consumers is not the way forward. Instead the industry would continue to serve medium-higher income consumers but with weaker constraints on its behaviours. The overall effect would be to just transfer the risk of misselling to consumers thereby undermining confidence and trust in financial services. Closing the advice gap, therefore, means focusing on making the financial services industry more efficient so it can extend its reach to more consumers and providing alternative provision for consumers who are not commercially viable for the for-profit advice sector.
We make a number of recommendations including:
- to tackle head on the myth of over-regulation, the FCA should make it clear that current regulation does not inhibit the development of innovative distribution models or prevent firms from using their discretion on how to deliver advice – we see no need for ‘safe-harbours’ or ‘long stops’ to achieve this;
- the FCA should actively support the use of innovative technology to streamline and improve the economics of distribution and improve the level of service provided to consumers (for example, by helping consumers understand attitudes to risk and/ or behavioural biases).
But the important thing to note is that we do not need to reduce consumer protection to encourage greater use of these innovations. Ultimately, as we have explained, the main barriers to good quality, objective advice are economic not regulatory. Therefore, if the advice gap is be to tackled, the FCA should have a relentless focus on driving down product manufacturing and distribution costs, and driving up the quality of products. Reducing the unit costs of distribution would bring more consumers into the market. To do this, we make a number of recommendations:
- One of the major barriers to market efficiency and access to advice is the unnecessary proliferation of providers and products on the market. We urge the FCA to build on the success of the Retail Distribution Review and become more proactive in using its product governance powers to drive out poor value providers and products.
- The FCA should require fund managers to bear all transaction costs involved in managing portfolios and charge a clean, single fee. This would align the interests of fund manager and clients, deter costly churning, and reduce product manufacturing and distribution unit costs.
- Furthermore, we argue for a new form of RU64 which would require advisers and intermediaries to justify clearly to consumers why they are recommending a more expensive investment fund rather than a cheaper passive fund.
- Moreover, it is important to remove any confusion around the definition of advice and advisers. There is no need for distinctions such as simplified advice, basic advice, focused advice or generic advice. Either advice is given or it isn’t. Anything involving a recommendation on a course of action (whether it involves a financial strategy or recommendation on specific product) provided by an adviser or algorithm (‘robo advice’) is advice. Anything else is execution-only and should carry prominent warnings regarding the risks of losing valuable consumer protection. Similarly, it should be made clearer that only advisers who comply with strict definitions of independence – fee based, duty of care to client, no ties to any product manufacturer – are allowed to use the term independent financial adviser. All other types of adviser should be called sales agents.
- But, even with major efficiency gains, large numbers of consumers will always be commercially unviable for for-profit financial services firms. Alternative solutions are needed. We support the creation of a National Financial Advice Network to provide advice, guidance, and information to consumers who are not commercially viable for the for-profit financial services industry. This must involve some form of cross-subsidy either from the public purse or from the industry. This idea was originally proposed by Which? in 2002 – see http://www.staticwhich.co.uk/documents/pdf/a-national-financial-advice-network-which-response-181710.pdf
The full submission can be found here: financial inclusion centre FCA FAMR submission publication final