The Discussion Paper on the Advice Guidance Boundary Review examines how authorised firms can provide more support to customers.

By Rob Moulton, Nicola Higgs, Becky Critchley, and Charlotte Collins

The FCA has published a Discussion Paper (DP23/5) with the government on the Advice Guidance Boundary Review, which seeks views on the following three proposals:  

  • Further clarifying when firms can provide support to consumers without giving regulated financial advice
  • A new approach that would allow firms to provide support tailored to groups of people in similar circumstances
  • A new form of simplified advice that would make it easier for firms to provide affordable advice to clients with more straightforward needs and smaller sums to invest

Background on the Advice Guidance Boundary Review

As part of its Consumer Investments Strategy, the FCA has been considering how it can close the so-called “advice gap”. Amongst other things, the Strategy tracks a metric of how many UK adults have £10,000 or more of investible assets held mostly or entirely in cash. The FCA published a two-year update on the Strategy in parallel with the Discussion Paper. The regulator is conscious that regulated financial advice is typically the preserve of the wealthy, and that many consumers with smaller sums to invest are only able to access factual information or guidance as no offering is available between this and holistic advisory services.

This position is compounded by the fact that firms can be understandably reticent about straying too close to the boundary between regulated advice (which for authorised firms means a personal recommendation) and unregulated support services. Equally, unregulated businesses offering financial guidance do not want to come too close to the regulatory perimeter as they are subject to a much broader definition of advice. For firms that do offer advice, providing holistic advice is often the only commercially viable option. This situation stems from the functionality of the current regulatory framework. The regulator sees this as an issue not only because consumers may be missing out on the support they need, but also because the inaccessibility of advice means that consumer harm may result from scam investments, fraud, and unregulated “advice” via social media channels. The key question for the FCA and the government is how they can encourage authorised firms to start to inhabit the middle ground between guidance and advice as a sufficiently attractive proposition.

The Review’s stated aim is to design a regulatory system whereby commercially viable, high-quality models of support can emerge so that consumers can access support through regulated channels. The focus is on authorised firms providing more support, not on unregulated providers, although the FCA notes that it may consider whether clarification of the regulatory perimeter is needed for unauthorised businesses.

The Review is specifically looking at the financial advice and guidance available for retail investments and pensions, with general insurance, mortgages, and debt advice being out of scope.

Obviously consumer protection will be a key consideration as part of any changes in this area, and the FCA highlights that it plans to leverage the Consumer Duty to set clear expectations for the support that firms provide to their customers. It also emphasises that the changes will not be risk-free, and enabling more consumers to receive support will necessarily require both firms and consumers to manage the resulting risks.

We explore the three proposals that the FCA and the government put forward in their Discussion Paper in greater detail below.

Further Clarifying the Boundary

The FCA is concerned that firms are not providing consumers with the support they should, due to an overly cautious interpretation of the current regulatory framework, and because they are concerned about the regulatory requirements that apply if they provide a personal recommendation. The FCA points out that customers may not be receiving good outcomes under the Consumer Duty if they do not receive the support they need (and which firms are in fact able to provide).

The aim would be to provide firms with greater certainty around the boundary between regulated advice and unregulated support, and help them feel more confident in operating closer to the boundary. This would build on the FCA’s boundary clarification document published in August 2023, which sets out examples of what does and does not amount to a personal recommendation. This guidance was intended to highlight the different ways in which authorised firms can support consumers under the existing regulatory framework without providing a personal recommendation. The FCA explains that it could either create new guidance or simplify existing guidance to give greater certainty to firms.

Targeted Support

The proposal in the Discussion Paper sets out a new regulatory framework that would broaden the support firms can provide to consumers. The premise would be that firms could suggest products or courses of action that are appropriate for a particular target market, based on limited information provided by the consumer. This would be a way of firms providing additional support to consumers who are unable or unwilling to pay for holistic advice, without them needing to incur explicit charges. However, firms would need to clearly disclose how the consumer is paying for the service through other charges.

This is the most radical proposal put forward, and would involve rethinking the way in which financial support is provided. The FCA sees this as a key proposal to close the advice gap, as it would help firms to provide support that falls in between general information and full-scale advice. The FCA outlines various scenarios in which it could see targeted support working. For example, a firm could highlight to a customer invested in a particular tracker fund that the product they are invested in is more expensive than other options and therefore may not represent good value for money, and then suggest alternatives with similar characteristics, but at a lower cost.

The FCA and the government are exploring whether the targeted support proposition should allow firms to suggest new products as well as providing support in relation to existing products, and whether firms should be permitted to suggest a single product as well as a range. They are considering how they could amend the legislative framework to enable firms to provide targeted support, either by creating a new regulated activity, establishing a new sub-permission for firms authorised to advise on investments, or allowing authorised firms to offer support if they have certain existing permissions linked to relevant products.

Some of the key considerations with this policy change would be how firms decide which information to collect from customers, and how to use that data to provide effective support. This option would be the riskiest for firms to engage with, as it could easily present various issues under the Consumer Duty. The FCA considers that it would be firms’ responsibility to ensure that customers understand the premise and the nature of the support they are receiving, and crucially that it is not fully personalised advice. It envisages that firms might leverage data and technology to help offer a cost-effective solution, although an automated approach could of course bring additional risks.

Another key issue is how firms would be remunerated for this support if they do not charge explicit fees for it. The FCA is open to different remuneration mechanisms and even considers that permitting limited forms of cross-subsidisation may be appropriate. However, the FCA is not back-tracking on its post-RDR approach and emphasises that remuneration via commission payments would still be prohibited.

Given the risks inherent in this offering, the FCA and the government are also keen to understand whether any limitations on product and investment range, or monetary values, would be appropriate.

Simplified Advice

The FCA and the government are considering a simplified form of advice that would enable firms to support consumers with simpler needs and smaller sums to invest, in a commercially viable way. This would result in one-off advice taking into account only relevant information about a specific consumer need. This proposal is aimed at enabling firms to better support those consumers who want to receive a personal recommendation when making a financial decision but for whom the more comprehensive support provided by holistic advice may not be cost-effective.

The FCA and government welcome comments on an appropriate product scope and financial limit for this proposition. Their current thinking is to exclude all pension decumulation decisions and to set an upper limit for receiving simplified advice at £85,000 (to align with the FSCS protection limit).

The FCA envisages that this option might be taken up by financial advice firms who want to service additional consumers. However, it might also be offered by investment platforms, retail banks, or other product manufacturers who want to develop simplified advice propositions. It acknowledges that a key consideration will be balancing consumer protection with commercial viability. To this end, the FCA is open to exploring a range of revenue models firms could use to be remunerated for simplified advice; however, it stresses that this approach must not reintroduce the potential for commission bias or conflicts of interest in product selection, or otherwise undermine confidence in advice.

Next Steps

Feedback is requested by 28 February 2024. The timing of next steps has not yet been set out, but the FCA indicates its plan with the government to engage with a wider range of stakeholders in forums and roundtables as well as in individual meetings to inform their specific policy proposals. Whilst the FCA and the government are eager to try and close the advice gap as soon as possible, they also seem conscious that some of the proposals could result in consumer harm if not formulated appropriately, and so this is not a policy area to rush. As well as considering changes to the FCA’s rules and guidance, they will consider if any legislative changes are required and in particular whether changes are needed to the Regulated Activities Order. The FCA may also consider whether the boundary for non-authorised firms is in the correct position, and whether further clarity could be provided around this boundary.