Core investment advice: a new regime

Who this blog is for:

Senior executives working across the banking and investment management industry, in particular those in charge of developing commercial propositions in relation to advice/guidance. It should also be of interest to risk and compliance functions assisting Line 1 on how to implement the core investment advice initiative successfully within their firm’s business model.

At a glance

• The FCA plans to introduce a new core investment advice regime (the Regime) that aims to provide mass-market consumers with simplified and straightforward investment advice in mainstream products.
• The proposed Regime has a narrower scope in comparison to holistic advice – the Regime is restricted to Stocks and Shares ISAs and their underlying investments and capped to £20,000 in investments.
• The Regime reduces required qualification levels for advisers providing core investment advice and simplifies suitability processes. This may allow firms to offer advice at a lower cost.
• Under the Regime, consumers will be able to pay for advice in instalments.
• The Regime is to be considered in tandem with FCA’s new Consumer Duty including the price and value outcome
• As a next step, the FCA confirmed its plans to conduct a holistic review of the advice/guidance boundary. This is likely to present a much bigger opportunity for firms and consumers alike to narrow the advice gap and will be eagerly awaited by the industry.
• In our view, the success or failure of the Regime will depend on consumers’ appetite to engage with, and access, core investment advice coupled with firms’ ability to design advice services at the right price point.Summary of the requirements
  

Introduction

The FCA published its consultation paper on Broadening access to financial advice for mainstream investments as part of its latest Consumer Investment Strategy update. The Consultation paper introduces a new Regime. The Financial Lives survey found 4.2 million people in the UK held more than £10,000 in cash and are open to investing some of it. The FCA is concerned that the number of consumers who hold £10,000 or more of investable assets in cash could experience harm given high inflation.

Through the FCA’s consumer research, it identified that many consumers would like more support with financial decisions such as investing in stocks and shares ISAs (S&S ISAs). Many of them are less likely to access professional support than those with more investable assets are. Additionally, an FCA review also found that firms have been concerned about the economic viability of providing advice to mass-market consumers given existing requirements around suitability, initial customer fact finding, adviser qualifications and adviser charging.

The FCA expects that the proposed changes will allow core investment advice to be provided to consumers at a lower price point than holistic financial advice.

The Regime – key features

The Regime will be much narrower in its scope than holistic advice, being defined by three conditions:

• advice can only be given on investments into S&S ISAs;
• it should only relate to the sub-set of investment products eligible for a S&S ISA; and
• it is capped at the value of the annual ISA subscription limit, currently £20,000.

The FCA is proposing simplified requirements for firms offering core investment advice. These include:

• reducing existing qualification requirements for staff providing the advice, to reflect the lower risk given the narrow scope of advice;
• simplifying the suitability requirements so that fact finding is less onerous for firms and there is clarity on the extent of firms’ liability;
• limiting the range and/or products and possible investments advisers can recommend under the Regime; and
• providing more flexibility in charging structures with consumers able to pay in instalments.

The Regime will exclude advice which recommends investment into Restricted Mass Market Investments (RMMIs) and Non‑Mass Market Investments (NMMIs). RMMIs are defined as “a non‑readily realisable security, a P2P agreement, or a P2P portfolio”. With NMMIs defined as “a non‑mainstream pooled investment or a speculative illiquid security”. Some of these investments are currently included on the qualifying investments list for S&S ISAs.

The FCA recognises these investments pose a higher risk and are potentially more complex in nature. This exclusion makes it clear that the Regime should only apply to a sub-set of investment products. With the reduction in qualification levels required for advisors under the new Regime, it is important that the potential investments risks are reduced to avoid customer harm – the FCA has made clear that the Financial Services Compensation Scheme (FSCS) as well as the ability to complain to the Financial Ombudsman Service (FOS) will apply for core investment advice in the same way as for holistic financial advice.

Why the simplification of suitability?

Under the current advice framework, firms face significant challenges to provide advice on a commercially viable basis to consumers with lower investment amounts and/or simpler needs.

To address this issue, the Regime proposals include non-handbook guidance on suitability aimed at providing more flexibility and a degree of simplification in respect of the application of suitability requirements. The guidance includes a description of what level of information collection on investment objectives would be sufficient, what indicative time horizon of investment (five years) would be acceptable, how to ensure the customer has the necessary knowledge and experience to make the investment and what information to gather to determine the financial situation and capacity for loss of the customer.

The simplification of suitability may allow for the fact finding to be potentially less onerous for firms, arguably resulting in reduced costs which will enable them to provide advice at an affordable price. Whilst there may be concerns that the simplification may increase the risk of poor outcomes, provided the Regime is adopted alongside appropriate product governance frameworks and the Consumer Duty, the FCA is of the view that the Regime should still provide an appropriate level of consumer protection.

Firms will want to explore the extent to which the more detailed guidance on suitability might help in developing both robo and hybrid advice models that meet the needs of these customers and provide the advice required at an attractive price point. However, it is worth noting that in the Financial Lives Survey 2022 the data shows that 81% of UK consumers would have a low level of trust in computer decision-making to complete financial advice without any human interaction. The challenge for firms is to develop an advice model that consumers trust and are willing to engage with, at a price point they can afford and delivers good outcomes.

How does Consumer Duty affect the Regime?

The Regime will be subject to the Consumer Duty rules and this means that firms will need to demonstrate that customers under the Regime are receiving good outcomes. Firms will need to consider the price and value and consumer understanding outcomes to ensure they do not fall short of the rules. To comply with the product and services outcome, firms will need to ensure they have the appropriate product governance processes in place to determine what products are to be considered in scope and to stop advisors who are only qualified to provide advice under the Regime, from advising on products outside of their remit.

Some firms have already highlighted concerns on how the Regime will presents challenges. One example would be a consumer who had previously received simplified advice under the Regime but through successive investments had exceeded the maximum investment limit of £20,000. Firms will need to develop a strategy, in line with the Consumer Duty, to continue to meet the needs of consumers who have exceeded the scope of the Regime.

Conclusion

The industry has broadly welcomed the consultation. It represents a material step in the right direction, helping to create a more accessible investment advice regime for the UK mass market. The success or failure of the Regime will depend on consumers’ appetite to engage with, and access, core investment advice coupled with firms’ ability to design advice services at the right price point. Even more importantly, if the Regime is successful, it might open the door for expanding its scope into other areas where advice could make a difference and improve consumer outcomes. The FCA is expecting to complete a holistic review of the advice/guidance boundary, which could enhance firms’ ability to provide advice or enhanced guidance across a broader range of products and services and thus reaching many more customers than at present.

Next Steps

The FCA is gathering feedback on its proposals until 28 February 2023. The FCA aims to publish a final policy statement, rules and guidance in spring 2023, with a target implementation date by end March 2024. Firms will be able to start offering core investment advice from April 2024.