FECIF Secretary General
Interesting implications for the rest of Europe and beyond?
Last month saw the publication of the results for the UK’s Financial Advice and Market Review (FAMR). Whilst this might not have had much in the way of impact elsewhere across Europe, it perhaps should have done. I will explain why….
The FAMR was jointly conducted by the regulator, the FCA, and the Treasury, the UK government’s economic and finance ministry. The 85 page report made 28 recommendations, predominantly focused on improving consumer access to advice.
It acknowledged that "a number of factors, including the significant costs of providing face-to-face advice, mean that it may not be economical for firms to serve consumers with lower amounts to invest or with simple needs".
This is tacit agreement – or at least acknowledgement – that the ever rising tide of regulation has led to a widening advice gap, and that something needs to be done to address this. A number of the recommendations are worthy of examination and comment I feel.
Regulated advice should be based on a personal recommendation in line with MiFID
This may seem a bit of a strange recommendation as any adviser in the UK, under present regulations, would automatically provide a personal recommendation. The purpose, however, is to be clearer as to what advice is.
For some time the advisory sector has been clamouring for the regulator to create and categorise “Simplified Advice” in order for it to potentially provide assistance to the mass market in a cost-effective way. In other words, simple advice for simple requirements with less compliance burden, whilst maintaining client protection. A sensible idea one might suggest.
What this recommendation provides, however, is freedom for firms to offer other sorts of help – “information” or “guidance” perhaps - without falling, or at least drifting, into the area of regulated advice. That is not a simplified advice framework.
On the one hand, this makes sense to me. We need to use technology as much as possible to engage consumers with their financial planning needs and if we can inform (and even educate to a degree) without the cost of fully regulated advice then this should be a positive outcome for all stakeholders.
On the other hand, this only works, in my opinion, if the consumer is fully aware of the difference. If an investor believes that they are receiving advice, and assumes that this comes with the significant protections that regulated advice embodies (expertise, qualifications, redress, PI cover etc etc), only to find at a later stage – usually when things have gone wrong – that they only received information and guidance - and, effectively, made their own decision - this could lead to disastrous outcomes.
As one commentator put it: “It's all very well to suggest no algorithm can produce a personal recommendation but there will be immense difficulty in making sure such an outcome doesn't seem personal, particularly where the automated system is highly sophisticated”.
Consumer perception is the key and, at the moment, surveys suggest that investors rarely understand the difference.
New guidance to support firms offering services that help consumers making their own investment decisions without a personal recommendation.
This is probably very much needed and obviously carries on, to some degree, from the first recommendation above. But there is a theme here and my concerns noted earlier are simply intensified by this suggestion.
We need a shortlist of potential new terms to describe 'Guidance' and 'Advice'
Some industry experts have suggested that this is a waste of time. Given my earlier comments it is perhaps already clear that I potentially disagree, at least in general terms.
It seems from this report (and other recent developments that I will mention later) that the future of personal financial planning may well be polarised into:
- “Advice” - fully regulated with various consumer protections in place and
- “Guidance” – potentially unregulated with little or no consumer protection other than against fraud and deception. This is the “caveat emptor” (buyer beware) scenario of most residential property markets – that is not necessarily a problem in itself, as long as the buyer knows that they need to be aware!
If this polarisation does develop, surely the consumer needs to be very clear as to the difference. We may not need new terms – on reflection, “advice” and “guidance” are reasonably clear – but we do need to stress exactly what the differences are between these two terms and in the service the investor is really receiving from each.
If this difference is not clear some entities may seriously abuse this “loophole” to “sell” inappropriate products to an unsuspecting public. I haven’t mentioned the banks but some might suggest them as an example at this point.
No return to commission
This was actually a non-recommendation, in other words it was not mentioned in the report. For the UK market this is probably a sensible approach – going “backwards” in this regard was potentially fraught with problems and dangers.
Perhaps that in itself is a lesson for other countries – once you ban commissions, there may not be any way back to them if things don’t go to plan?
Now, let’s take the above and add to it a few other headlines from last month:
- “RBS cuts advisers, moves clients to ‘robo-advice’”
- “The rise of investment fintech”
- “Australian regulator to provide ‘robo-advice’ guidance”
In addition, the UK and Australian regulators confirmed that they would work together to help fintech firms from each country develop services in the other – and we had a major EU consultation on “Automation in Financial Services”.
Do you see the thread now?
I should stress that I am very much in favour of increased digitalisation in our industry in general, and in the advisory sector specifically. I would just like to avoid the irony of advice becoming more regulated than ever before, in the name of consumer protection, whilst the activities of regulators and governments actively push consumers towards unregulated “guidance” that the public feels comes with the same protections and safeguards.
This would be a very painful paradox for consumers - and could be another huge disaster for our industry.
Perhaps the saving grace, at least for now, can be found in another headline: “Investors trust the media more than robo advice, survey finds”. Food for thought…………
RBS cuts advisers, moves clients to ‘robo-advice’ - http://www.internationalinvestment.net/regions/rbs-cuts-advisers-moves-clients-to-robo-advice
The rise of investment fintech - http://www.international-adviser.com/news/1028212/rise-investment-fintech#sthash.tmXYAp3y
Australian regulator to provide “robo advice” guidance - http://www.international-adviser.com/news/1028169/australian-regulator-provide-robo-advice-guidance#sthash.4Mub5hzQ
Investors trust the media more than robo advice, survey finds - http://www.international-adviser.com/news/1028159/investors-trust-media-robo-advice-survey#sthash.j3KWLVi1