FCA hints at further reforms in financial advice market

In a new report, the regulator said that previous reforms stemming from its Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR) had enabled improvements in the financial advice market but that many consumers are still "missing out on the potential opportunity to make their money work better for them in the longer term" because they are choosing to hold their money in cash rather than invest it. The FCA pinpointed the role technology can play in encouraging more consumers to invest their finances.

"Although there has been some innovation in the market, in particular around the development of automated advice, there is more scope for further development and innovation of models and services that could serve more consumers at different stages of their lives," the FCA said. "Our ambition is to facilitate a market that supports consumers so they make the decisions that are right for them, and make the most of the money they have."

"There are some positive trends around the use of technology and innovation among adviser firms that anecdotally Covid-19 appears to have accelerated, which we’ll look to continue to support through our future work," it said.

The RDR was introduced in 2012 and introduced major changes designed to make the retail investment market work better for consumers. The changes included new transparency requirements around adviser charging, a stiffening of the qualifications advisers needed to meet, and drawing a regulatory distinction between independent and restricted advice in order to reduce so-called product bias.

In 2014, the FCA published the first of three planned post-implementation reviews. That research found the RDR had improved the service offered to consumers by financial advisers and reduced the level of product bias, and that new rules on adviser charging had reduced the cost of products and platforms. Additional research also showed that fears of an 'advice gap', restricting the availability of lower value advice products to those with less complex demands, had largely been unfounded.

However, the FCA said that the cost of advice itself had not appeared to have decreased, and that in some cases it had even increased despite a "surprisingly high number" of firms incurring little or no additional costs as a result of the changes. The first review led to further proposals aimed at addressing these issues, including how firms could better disclose information to consumers.

FAMR took place in 2015 and aimed to identify ways in which the government, industry and regulators could take collective steps to stimulate the development of a market which delivers affordable and accessible financial advice and guidance to everyone, at all stages of their lives.

Improvements to the market identified by the FCA since the conclusion of FAMR include a 6% increase in the number of UK adults to have received financial advice, a rise in the number of financial advisers practicing in the market, increased consumer awareness of automated advice services and a 700% increase in the value of assets under automated advice services.

Charlotte McIntyre of Pinsent Masons, the law firm behind Out-Law, said: "After a 10 year process of review and change, the financial guidance and investment industry will be pleased with confirmation that, whilst there is more to be done, the industry is moving in the right direction to reduce barriers to investment and increase access to financial advice."

"Innovation to harness technology, by developing AI and automated advice services largely aimed at the mass market, continues to expand – a trend given added impetus by the pandemic. Industry participants will now be looking to the regulator to make changes to current regulatory guidance to enable the financial guidance sector to take even greater advantage of technological developments, facilitating a more innovative market which assists greater numbers of consumers," she said.

The FCA admitted that the current regulatory regime "may pose challenges to further market development in sufficiently meeting these consumer needs" and that it recognises its role "in making sure the regulatory issues noted in this report are explored and addressed, where possible".

The FCA said it will feed the evidence from its RDR/FAMR evaluation into its separate call for input on consumer investments, which is currently open for consultation, "to inform its next steps". Businesses can expect the first detail of what reforms will be propose to be shared by the regulator in 2021.