Fresh off the first implementation of Consumer Duty, the Financial Conduct Authority has released their discussion paper committing to reviewing the boundary between advice and guidance. These two distinct pieces of regulation share commonality in their attempts to deliver better outcomes for consumers. Consumer Duty seeks to create a culture whereby customers’ needs are put first, while the Advice Guidance Boundary Review is looking to ensure consumers can access support for financial decisions.
A core thread of their work, the Financial Conduct Authority is looking to redress the balance that for too long has been tilted in favour of the industry. A situation where the knowledgeable exploit information asymmetry to extract economic rents in return for poor quality products and service, if any, and poor-quality outcomes. This is why the Consumer Duty and the outcomes-based approach to it is so crucial, implementing a form of higher moral principle and standard to stop the unscrupulous finding ways to operate nefariously within the rules, and to remove the scope for non-consumer-centric incentives.
It is difficult to present any counter argument to efforts to restore parity in the relationship between financial services and the consumer. It is absolutely the right thing to do, and rather than financial services being out of kilter with most other sectors, perhaps it is the other sectors that need to catch up.
The Financial Conduct Authority are proposing three options to resolve the advice gap under the advice boundary review; further clarity around where the boundary sits between advice and guidance, a simplified advice regime that would permit firms to offer one-off investment advice to consumers with less complex needs, and a proposal for Targeted Support. The latter is by far the most interesting with, in my opinion, the greatest potential to remedy the most prevalent consumer harm – the outcomes that mass market consumers will experience in the continued absence of nudges and financial decision-making support. The most obvious and well understood example being mass retirement poverty as our population ages and the responsibility shifts from the state and employers to the individual.
Will Targeted Support resolve the advice gap? If you look at the main barriers to adoption of financial advice, it centres on not knowing where to start, perception of the cost/value, and never being cognisant, or contemplative of advice as a service. Furthermore, with the Retail Distribution Review firmly defaulting the target market for traditional advice to the high-net-worth cohort, many rightly feel they do not meet the wealth threshold. The proactive nature of targeted support, permitting courses of actions to be put to, or “sold to” consumers, combined with the illusion of “being free” under cross-subsidisation could counter these barriers.
These barriers sit on the demand-side but there are supply-side issues too, particularly designing a scalable proposition that works for the mass market within the confines of the existing regulatory framework. The task of improving financial outcomes for consumers requires a mixture of supply and demand-side initiatives and cannot be resolved with a narrow focus on supply-side solutions alone. The supply-side is where Financial Services has focused its attention and that’s why many propositions and solutions never gain traction or meaningfully remedy the issues.
Robo and algorithmic advice is a pertinent example of a proposition that looked to have the capability to resolve the ‘advice gap’ by using technology to lower the wealth entry point significantly and leverage behavioural finance to help consumers navigate and understand it. However, like many efforts, it was a ‘build it, and they will come’ solution with the demand-side strategy requiring excessive marketing expenditure to generate awareness and attract customers. Consumers didn’t know they needed it or didn’t know it was there, and if they did, didn’t understand it and didn’t trust it, retaining a preference for human interaction in financial decision making.
The work the Financial Conduct Authority is progressing around the advice guidance boundary is an important contribution to improving outcomes. Auto enrolment created an increasing mass of long-term savers. The consequences for the individual are only compounded by the societal implication of the continued absence of financial decision support and nudging consumers onto a better financial path.
I do believe that Targeted Support can help. The ability to promote courses of action to consumers based on ‘people like you’ insights will help stimulate the demand-side, but I would challenge the efficacy without wider initiatives. How many seemingly good propositions have come to market, only to fail to gain traction. The regulator’s ongoing efforts are admirable but does the safety net create over-confidence and obscure the need for consumers to take more personal responsibility? It’s not just on consumers. The government need to act more on generating greater consumer understanding, awareness and financial literacy. It is my hope that the final guidance on the advice guidance boundary delivers Targeted Support in a manner that tries to embed financial coaching to help consumers understand the what, the how and the why.
