FIMC recently submitted a response to the Financial Conduct Authority (FCA) Consultation Paper CP26/10 Simplifying the Pensions & Investment Advice Rules. The submission can be found here: FIMC CP26-10 simplified advice 220526
Summary of our submission
We fully support the overarching objectives of ensuring more consumers: have the support to make positive financial choices and avoid making suboptimal decisions;[1] and receive better value for money from the financial advice market.[2]
But, we question the means by which the FCA intends to pursue these objectives. The proposals on simplified advice cannot be considered in isolation and must be seen in the context of the wider reforms to the market for financial advice and the redress system. The combined effect of the reforms will be to weaken consumer protection and access to due redress.
We fully support the FCA’s aim of streamlining and simplifying the rulebook where this can be done without compromising consumer protection. Yet, the latest proposals introduce yet more complexity and confusion into an already complex financial advice market. Consumers in the process of making some of the most important financial decisions in their lives will now have to differentiate between six different types of service and understand the relative value and consumer protection standards that accompany those services – information only, guidance, targeted support, basic advice, simplified advice, and full scope advice. If ongoing advice services are included that makes seven types of service. This is not a market designed around consumer needs; rather it is designed to accommodate the business model preferences and concerns of the market.
The package of reforms, including targeted support, will weaken consumer protection in the market. With targeted support, and now simplified advice, the FCA is trying to shift responsibility for suboptimal outcomes to consumers and is giving firms safe harbour protections when selling products based on a more limited understanding of consumers’ needs and circumstances.
Some may argue that the Consumer Duty will provide the necessary protections. But that is not a logically consistent position. Redrawing the regulatory boundaries and providing ‘safe harbours’ must by definition limit the reach of the Consumer Duty and, in addition, reduce firms’ potential liability for redress. If the Consumer Duty did retain its current application, then obviously the industry would not be satisfied.
Moreover, steps are being taken to bring FOS more within the orbit of the FCA thereby limiting the ability for FOS to take an independent view on what is fair and reasonable. Furthermore, specific proposals in CP26/10 could potentially impact a consumer’s ability to make a civil claim for damages through a private right of action (PROA), including the ability to make a claim to the Financial Services Compensation Scheme (FSCS) where a firm fails. The FCA would also not be able to impose an industry-wide consumer redress scheme in relation to breaches of the Duty under section 404 of FSMA.
We also struggle to see how some of the key proposals on suitability and proportionality will work in practice. Some of the proposals contained in the consultation seem to contradict the Consumer Duty requirement for firms to avoid causing foreseeable harm and could lead to situations where firms’ sales staff are encouraged to ‘unknow’ information gleaned during the advice (or more accurately the sales) process.
This consultation paper reveals once again that many firms appear to seriously struggle with a system that allows them significant discretion on interpreting what legislators, via regulators, expect of them with regards to treating customers fairly. In effect, parts of the market does not trust itself to provide innovative advice services for fear of falling foul of what are not particularly demanding regulatory standards. It surely should be a cause for concern for the FCA that the senior leadership of financial institutions, whose behaviours can have a significant impact on the welfare of millions of consumers, have had to be told what to do via prescriptive rules to stay on the right side of regulation.
At the same time, the industry complains that the rules are too prescriptive and ‘burdensome’. So, to try to square this circle, the FCA is moving towards an even more discretionary based approach which also seeks to give the industry more clarity. Of course, what the industry seeks is not clarity on rules but ‘safe harbours’ against the risk of being open to redress liabilities in a more permissive regime. Unfortunately, this is precisely what the FCA intends to give them via these reforms.
The FCA has attempted several times to accommodate the market, to give the market clarity and reassurance. Each time the industry has come back and demanded more. Whether or not the market takes full advantage of targeted support and simplified advice very much depends on how the FCA now polices the market and how much of a safe harbour the FCA provides firms in practice. We would not be surprised if, in the future, the industry comes back and asks for even more accommodation and further weakening of standards.
The FCA is relying more on outcomes-based regulation but appears reluctant to specify what constitutes good outcomes. It is relying instead on providing firms with more freedom and discretion on interpreting regulatory requirements and determining good outcomes. This could result in significant variability in outcomes, which could be suboptimal for consumers. We also think that this increasing reliance on an outcomes-based approach could make it harder for the FCA to monitor and supervise the market if there is a significant variability in the approaches adopted by firms.
The FCA could have utilised its flagship Consumer Duty initiative to greater effect. The FCA could have consulted on requiring firms via the Consumer Duty to be more proactive in identifying customers who are making suboptimal decisions.
Moreover, while the focus of these proposals are groups of underserved consumers, the FCA has identified a group of up to 1.5m potentially overserved advice takers who may paying too much for advice which provides little value. And, as we explain in the consultation response, the growth in fees generated from retail investors has far outstripped general inflation raising concerns about value extraction. Again, the Consumer Duty could have been used to ensure that the market is delivering value for money for investors.
Unfortunately, rather than actively use the Consumer Duty, the FCA has chosen to weaken consumer protection to incentivise the market. The key now will be for the FCA to issue clear guidance on what is not acceptable practice under this new regime and to make it clear that it will robustly enforce against harmful behaviours. Although, to reiterate, the way the FCA is moving the regulatory boundary means the regulator is limiting its own ability to act.
We are not convinced that much of the market will respond in the way the FCA hopes. If the market does respond in the way the FCA hopes, this will create consumer detriment which could have been avoided.
[1] For example, on the positive side by utilising available savings more efficiently and on the negative side by avoiding drawing down too much from pension pots.
[2] Interestingly, while the focus of these proposals are the groups of underserved consumers, the FCA has identified a group of up to 1.5m potentially overserved advice takers who may paying too much for advice which provides little value. And, as we explain in the response, the growth in fees generated from retail investors has far outstripped general inflation raising concerns about value extraction.