HM Treasury/ Financial Conduct Authority DP23/5 Advice Guidance Boundary Review

The Financial Inclusion Centre has submitted a response to the discussion paper produced by HM Treasury (HMT) and the Financial Conduct Authority (FCA) on the Advice Guidance Boundary Review. Our submission can be found here: FIC response FCA DP 23-5 final 0224

This is a crucial moment for the future of consumer protection in financial services. We have been observing with growing concern the increased lobbying activity by financial services trade bodies to reduce consumer protection across a number of sectors including insurance, consumer credit, and financial advice and investment markets.

The FCA should be congratulated for the significant improvements it has driven through in conduct of business standards in the financial advice and investment markets. We are concerned that the very real progress made as a result of the implementation of the Retail Distribution Review (RDR), and robust FCA supervision, is at risk of being reversed due to the proposals in DP23/5. These proposals would also undermine the FCA’s flagship Consumer Duty reforms.

We do appreciate the pressure the FCA is under from government and industry lobbies to redraw the regulatory boundary. But we have urged the regulator to stand firm and not implement what we believe would be ill-advised reforms.

Summary of Financial Inclusion Centre’s concerns

The proposals in DP23/5 would introduce new models of advice called ‘targeted support’ and ‘simplified advice’ to add to the existing models of information, guidance, and holistic advice. The proposals in DP23/5 would further complicate an already complex advice market. We are particularly concerned about the push by industry lobbies to redraw the advice boundary to limit firms’ liability for redress.

Industry lobbies claim they want to close the so called ‘advice gap’. But, we believe the real intention is to change the regulatory boundary to facilitate sales of greater volumes of higher cost, riskier financial products while reducing firms’ potential liability for redress in the event of consumers being sold suboptimal products. The Consumer Duty would not act as a backstop in this case as firms would now be operating within a redrawn advice boundary.

The introduction of targeted support will not address the fundamental cause of the ‘advice gap’. Due to the economics of distribution, the commercial financial services sector is unable to serve millions of consumers on terms that make sense for both consumers and the industry. Weakening consumer protection by changing the boundary will not improve the economics of distribution. This would not suddenly make millions of households with modest assets commercially attractive to the for-profit financial services industry. However, it would enable the industry to target and extract more value from comparatively better off households.

Further complicating an already complex advice market will make it harder for consumers to understand the nature of advice they get. It will make it harder for consumers to understand their rights to redress in the event of being given unsuitable or inappropriate advice.

We have seen in the past that fierce competition has been a primary cause of consumer detriment in this market. Firms competed aggressively for market share and distribution, not for consumers. The Retail Distribution Review brought discipline and self-restraint into the market. Weakening consumer protection would surely incentivise more aggressive selling of high risk, high-cost products.

Some firms might behave responsibly at the outset. But, competitors would use the redrawing of the boundary to target better off consumers and migrate them up the product chain to higher cost products with reduced liability for redress. Responsible firms would soon find themselves losing market share. They would have to respond by also adopting more aggressive business models.

‘Targeted support’ would be a very ill-advised option particularly if the FCA accepted the industry lobby arguments that the boundary should be redrawn. We take issue with the use of the term ‘support’ with this option. Targeted support would be used by the industry as an opportunity to channel consumers into higher risk, higher charging products. In other words, this would be selling not support.

We note also that DP 23/5 proposes that with targeted support firms would be making ‘suggestions’ to consumers not recommendations. We think this has the potential to mislead consumers. Firms would be designing interventions, including behavioural interventions, with the express intent of persuading consumers to take a particular course of action. This would be, in effect, sales advice delivered within a redrawn boundary with access to redress restricted.

Industry lobbies claim that: the boundary can be safely redrawn; firms will use the opportunity responsibly and so the risk of harm is limited; and that the Consumer Duty would act as a ‘backstop’. In our view, this is an illogical and disingenuous position. If firms really believed they could use targeted support responsibly then they should not object to retaining the current boundary and consumer protection standards. After all, if their systems and controls are so good, then there would be few incidences that would give rise to redress claims so they would not be exposed to high redress costs.

But, the fact that industry lobbies are seeking to redraw the boundary and limit access to the FOS, speaks volumes. They do not actually have confidence in firms’ systems and controls. They are aware that fierce competition could emerge with the weakening of consumer protection. Firms would have to adopt aggressive sales tactics to compete – see above. The risk of consumers being sold suboptimal products would grow so they want firms’ potential liability for redress reduced.

Remember, the whole point of the industry preferred model is to transfer the risk of suboptimal products being sold to the consumers. In a nutshell, if HMT/ FCA go ahead with targeted support, the opportunity will be created for firms to aggressively sell high cost, higher risk potentially suboptimal products but with reduced liability for redress.

To be clear, we want to see ‘innovative’ advice models emerging. We have no issue with firms offering targeted advice as long as they retain liability for redress. Targeted advice is still advice. The intention would still be to persuade consumers to take a set of actions. In our view, the ‘reasonableness’ test in the Consumer Duty already protects firms. Firms have to take appropriate account of the needs and characteristics of the relevant retail customers. There may well be merit in further clarifying the advice boundary. But, redrawing the boundary would undermine the effectiveness of the Consumer Duty.

Redrawing the boundary and introducing yet more categories of ‘advice’ is unlikely to address the issue of consumers investing in speculative or unregulated products. Making it easier for regulated firms to sell ‘mainstream’ products to consumers attracted by the prospect of high returns and the thrill of speculation is not going to act as a constraint on those consumers indulging in detrimental behaviours.

Instead of further complicating the market, simplification would be better. We argue for clear distinctions between:

    • Advice and information. Advice in this case should be taken to mean any promotion, communication, engagement, or recommendation intended to influence or cause a consumer to take action or make a decision on a financial matter. This may not necessarily involve a personalised recommendation or require a decision on a specific product or service. Information should be defined as material intended only to answer questions or provide factual information but without intending to cause a consumer to take action. Firms will know which of their activities are intended to influence consumers to take action.
    • Independent advisers and sales agents/ promoters. The term independent should be reserved for individuals and firms that are remunerated entirely by fees paid by the consumer. All others should be called sales agents or promoters and be required to inform consumers in clear terms about the risks and limitations of their services.
    • For-profit and non-profit. We do see a case for allowing advice charities, other non-profits, and public bodies such as Money and Pensions Service (MaPS) more freedom to proactively advise consumers on savings and a limited range of investment options (without recommending specific products).
    • Furthermore, rather than weaken consumer protection to incentivise firms to provide advice to underserved households, the Government and FCA should explore alternative models such as a National Financial Advice Network funded by a levy on the industry. The FCA should pursue the development of portable fact finds to help address the cost of collecting information on consumers’ personal circumstances.