Out-Law News 5 min. read

Review proposes redefinition of financial advice based on 'personal recommendation'

The definition of regulated financial advice should be "narrowed" to catch only that which is based on personal recommendation, with firms also given more flexibility to help consumers make their own investment decisions, according to a government-commissioned review.

This new definition would bring the current UK regime, as defined in the Regulated Activities Order (RAO), closer into line with the EU definition set out in the Markets in Financial Instruments Directive (MiFID), the year-long Financial Advice Market Review (FAMR) has concluded. Any amendment would require UK government consultation, while the Financial Conduct Authority (FCA) should consult on new guidance including case studies to help firms support consumers in making their own investment decisions, according to the review.

Co-chaired by acting FCA chief executive Tracey McDermott and the Treasury's director-general of financial services, Charles Roxburgh, the FAMR has produced 28 recommendations to narrow the 'advice gap' and improve the accessibility and affordability of financial advice and guidance. These range from offering more support to firms wishing to develop automated 'robo-advice' models, to allowing consumers to redeem a small part of their pension pots to cover the cost of financial advice pre-retirement.

"In proposing a consultation by the Treasury on the definition of regulated advice under the RAO, FAMR has opened the door to a potential change that severely restricted the previous review of advice," said insurance and wealth management expert Tobin Ashby of Pinsent Masons, the law firm behind Out-Law.com.

"The report provides a clear steer towards converging regulated advice in the UK with the 'personal recommendation' concept used in EU laws. This is a logical step that could go a long way to providing the clarity for firms that the report acknowledges is currently missing. Taking the recommendations together, this report does seem capable of ultimately producing the kind of framework needed to support consumers with simple requirements making important financial decisions," he said.

FAMR was commissioned as a means of addressing the 'advice gap' discouraging consumers with lower budgets and less complex financial needs from accessing financial advice. A 'call for inputs' published by the review panel at the start of the project found that adviser numbers had fallen along with demand over recent years, in part because of the growing trend towards consumers making and executing their own financial decisions and in part because of affordability and accessibility issues.

The report found evidence of low awareness and uptake among consumers of free, public guidance services, and "nervousness" among firms about providing helpful support and guidance for fear of straying into providing regulated advice. Firms are potentially liable to consumers for any loss caused if, in seeking to provide guidance, they were subsequently found to have been giving regulated advice without meeting relevant regulatory requirements, such as establishing a particular consumer's suitability for a particular product.

By amending the legislation that currently defines regulated financial advice, the government would not only create a single definition for advice but also remove some of the barriers preventing firms from instead offering cheaper or free guidance services, according to the report. The Financial Advice Working Group, which will build on the work of FAMR over the next 12 months and report back to the government on its progress, should work to design a set of 'nudges' and 'rules of thumb', such as those currently available on the Money Advice Service (MAS) website, to encourage consumers to engage with their own financial decisions, the report said.

The report has, however, ruled out a return to a commission-based system of funding financial advice, despite recent press reports to the contrary. Adviser commission was banned as part of the Retail Distribution Review (RDR) conducted by the FCA's predecessor, the Financial Services Authority (FSA), and although FAMR found some support for the return of commission payments this support was "outweighed" by the strong arguments against the old rules, including "the lack of transparency and distortion of incentives", the report said.

Giving firms the freedom to develop "more streamlined" services and automated advice models would further improve the cost-effectiveness of advice and guidance, according to the report. It has recommended that the FCA set up a dedicated team within its 'Project Innovate' Innovation Hub, which would be able to provide firms developing mass-market automated 'robo-advice' models with ongoing feedback on regulatory implications throughout the process. The FCA should also develop a 'general toolkit' setting out best practice for testing and evaluating automated advice models, which all firms would be able to access.

The review also acknowledges the particular need for more and better financial advice at retirement, following the introduction of new rules giving savers more flexibility over how they access their pension pots in April 2015. It has recommended that employers take a more active role in "supporting employees' financial health", supported by a factsheet to be developed by the Treasury and Pensions Regulator setting out what they can do without being subject to regulation. The Treasury should "explore options" to allow consumers to access a "small part" of their pension pot to cover the cost of pre-retirement advice before the normal minimum pension age, and should also "challenge" the industry to develop a central pensions 'dashboard' allowing consumers to view their lifetime pension savings in one place by 2019.

"It is difficult to see what is new about this," said pensions expert Simon Laight of Pinsent Masons. "You can already get financial advice paid for from your pension pot, even before normal minimum pension age. The FCA recommendation is that you take the money out first and then pay the adviser direct - same result, different route. On its own, this recommendation doesn't get us much further forward."

"On the other hand, narrowing the definition of advice to personal recommendation will certainly be helpful for consumers. Technology-based guidance services, sometimes called 'nudge tools', are ready to go but providers hesitate from switching them on for fear of being found to have provided financial advice. The consumer is denied access to some very helpful material. But by narrowing the definition of advice, some barriers to offering guidance services are removed," he said.

"Improving the availability of workplace advice is also a good way to improve consumer outcomes. FAMR recommends increasing the £150 income tax and national insurance exemption on advice arranged by an employer. The exemption means employees are not liable for the tax as a benefit in kind. However, the exemption is of limited use as you can't buy much advice for £150 and the 'cliff-edge' nature means the entire amount becomes taxable rather than just the excess over £150. Increasing the limit or removing the cliff edge, or both, will certainly help," he said.

The report also contains a number of recommendations for the FCA ahead of its planned review of the way in which the Financial Services Compensation Scheme (FSCS) is funded, which is due to begin next month. In particular, this review should specifically consider the introduction of risk-based levies depending on the products and services sold by the firm, as well as changes to the funding classes, the report said. However, FAMR has ruled out recommending a 15-year 'long stop' on claims relating to advice given by advisers, on the grounds that this would remove protections for consumers of long-term advice or products with "limited" benefits to the industry.

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