Written by Kevin Okell on Wednesday 15 May 2013
“If it looks and feels like advice then it probably is advice”. On the face of it this pithy quote from the FCA’s Rory Percival sounds like a breath of straight-talking fresh air from a normally equivocal regulator. But read the rest of the article and it soon becomes clear that this is just another warning shot at D2C platforms and what the FCA sees as dangerous flirting at the boundary of advice and guidance. Having sat through a few blue sky workshops where the spectre of regulated advice has choked the life out of innovative ideas, I think it’s time to challenge the established advice regime.
So how did an innocuous little word like “advice” acquire such a daunting ability to kill a debate? It seems to me that the whole complex edifice of rules around regulated advice stems from successive regulators’ determination to deliver impartial advice by tightly prescribing the steps in the process and coming down hard on anyone that recommended products that turned out to be unsuitable – leading to a series of mis-selling crusades. Regulation of advice has become such an intrinsic part of the Financial Services landscape that these days we just argue about the definitions of our special terms rather than asking if they’re really special any more.
But a couple of recent developments have changed the landscape dramatically. First there was the RDR. The FSA concluded that, despite countless tweaks to the regulations, advice was still being biased by providers and it took the radical decision to ban commission. Second we have a clearly stated intention by the FCA to intervene much more actively in product design rather than waiting for consumer detriment to materialise years later. Taken together these two measure start to make Financial Services look much more like other industries and indeed the FCA is using motor industry metaphors in some of its positioning statements these days.
So, if we had a motor industry which ensured that all the cars it produced pass an NCAP safety rating, dealers were professionally trained in the important features of every available vehicle and they were paid only by customers for the service they provide, why would we need any regulation around how cars were sold? The fact is we don’t regulate how cars are sold despite the fact that only one out of those three safeguards are in place. Meanwhile the Financial Services industry is set to get the full set and yet providers continue to obsess about definitions of advice and go to great lengths to avoid accidentally providing it. Many service industries seem to get by with just professional indemnity insurance and the civil courts for redress when things go wrong. Some, like the legal and medical professions, do have their own professional bodies with the power to strike off members but no other industry has quite the elaborate machinery of Financial Services to prescribe precisely how the job should be done and still fine people when things don’t work out.
But maybe Financial Services is different. If a little old lady decides to blow her life savings on a red Ferrari, there is no regulation to stop the dealer from taking her money and most people would, I suspect, say that she should have the freedom to spend it. We’d be less comfortable about the idea of her investing the whole lot in a precipice bond but what’s the right way to regulate this? Maybe it’s going too far to introduce crash tests for financial products but tighter and tighter prescription around the advice process is not the answer either. What we need is a whole new approach to thinking about how customers will buy financial products in the future; one which recognises trends towards on-line research, star-ratings and crowd- sourcing and embraces rather than resists them.
How far the regulator can realistically go in trying to protect people from themselves in an on-line world is debatable but, I suspect they won’t be happy until little old ladies can’t accidentally buy red Ferraris.