Mind the UK ‘advice gap’: Considering the Advice Guidance Boundary Review

On 8 December 2023, HM Treasury (HMT) and the FCA published a joint policy paper (DP23/5) on the Advice Guidance Boundary Review (the Review). The Review is part of the ‘Edinburgh Reforms’ announced by the Chancellor in December 2022 and seeks to build a clearer ‘advice and guidance framework’ by examining the regulatory boundary between regulated financial advice and other forms of support, thereby potentially closing the existing so-called ‘advice gap’ under the current regime. 

By conducting the Review, HMT and the FCA intend to provide more clarity to firms to ensure they can provide consumers with better support whilst managing the risk of inadvertently straying into the regulated ‘holistic advice’ or personal recommendation space. The aim is to design a regulatory system where commercially viable, high-quality models of support can emerge so consumers can access the support they need through regulated channels.

Scope of the Review

The Review focuses on the boundary between financial advice and guidance for retail investments and pensions. General insurance, mortgages and debt advice are out of scope of the current proposals. In addition, the Review does not consider advice relating to transferring out of a defined benefit pension scheme or giving up other safeguarded pension benefits, as, in most cases, seeking advice on transferring out of a defined benefit pension scheme is mandatory due to the complexity involved and the potential risk of harm to the consumer.

Closing the ‘advice gap’

HMT and the FCA acknowledge that there is an advice gap under the current regime resulting from the dichotomy between ‘holistic advice’ on one hand and ‘information and guidance’ on the other. 

Holistic advice is where the consumer is provided with a view on the merits of a particular product or course of action based on comprehensive information about the consumer. This would be presented as a recommendation to meet the consumer’s objectives. Information and guidance, on the other hand, is described as an impartial service to help a consumer identify their options and narrow their choices without telling them what to do or which product to buy.

The gap between the two is said to exist partly because firms are deterred from providing greater support to consumers for the fear of inadvertently crossing the ‘advice boundary’ (and therefore needing to comply with more onerous regulatory requirements) and also because consumers are choosing not to access financial advice due to an unwillingness to pay for it or a perception that they would not benefit from it. As a result, consumers may be making decisions that are not in their best interests. 

As part of the Review, HMT and the FCA have set out three initial high-level proposals. These are intended to potentially fill the advice gap under the current regime and ‘smooth the cliff-edge’ between holistic advice and information and guidance, so that consumers are better supported when making investment and pensions decisions. 

The proposals

• Proposal 1: Further clarifying the boundary

Under this proposal, the current regulatory regime would be kept intact, and HMT and the FCA would issue further guidance or simplify existing guidance regarding the advice boundary (including the PERG 8 Annex 1 guidance on personal recommendations and other forms of advice). In August 2023 the FCA published a summary of existing guidance to provide further clarity in this area, but it acknowledges that concerns and uncertainty remain and that some firms are finding it challenging to develop their services to meet consumer needs.  The intention behind the new proposal is to provide FCA-authorised firms with greater certainty that they can give more support to consumers, and operate closer to the boundary, without providing a personal recommendation. The FCA could also make Handbook rules mandating specific actions in certain cases. 

• Proposal 2: Targeted support regime

Under the second proposal, HMT and the FCA would introduce a new regulatory framework that would enable firms to provide a broader level of support to consumers without providing independent advice. Firms would provide support in the form of ‘suggestions’ (rather than ‘recommendations’) based on limited personal information by suggesting products or actions that would be appropriate to a target market of consumers in similar circumstances. In other words, firms would suggest options to a consumer on a ‘people like you’ basis. To ensure that targeted support is available to as many consumers as possible, firms could offer such support for no explicit charges (i.e. no up-front charges specifically related to the provision of targeted support), provided they disclose to customers how costs are recovered through other associated charges. HMT and the FCA view this as an important new proposal to help close the advice gap and boost access to financial support across the UK.

• Proposal 3: Simplified advice regime

Like proposal 2, the third proposal would introduce a new regulatory framework to address the problems posed by the ‘advice gap’ under the current regime. This framework would enable firms to deliver a simplified form of one-off advice that is responsive to one specific need and does not take into account the other circumstances of a consumer. The proposal builds on the feedback received on the FCA’s ‘core investment advice’ proposal set out in its consultation on ‘Broadening access to financial advice for mainstream investments’ (CP22/24), which was limited to investments into mainstream products within a stocks and shares ISA up to a ceiling of the annual ISA subscription limit (currently £20,000). Respondents to that consultation liked the general idea of the new regime, but thought its scope was too limited to be appealing to a broad range of consumers or commercially viable. The intention behind the current proposal would be to enable firms, in a commercially viable and affordable way, to support consumers who want to receive a personal recommendation but have simpler needs and smaller sums to invest. A more streamlined regime will necessitate a narrower scope of products and services (e.g wealth accumulation products, but not pension decumulation products) and an investment cap for simplified advice (proposed at £85,000 to reflect the limit for FSCS protection). 

HMT and the FCA are seeking feedback on how to make it easier for consumers to pay for targeted support and simplified advice, without undermining the reforms introduced by the 2012 Retail Distribution Review (RDR), which ended commission payments and cross-subsidisation as ways of paying for personal recommendations of retail investment products. 

The way forward

As HMT and the FCA point out, too many consumers are reluctant to make financial decisions, often because they do not want to pay for financial advice or because they do not think they would benefit from it. As a result, many consumers are holding their savings in cash accounts that decline in value over time, remain invested in funds without considering any subsequent adjustments to their investments or make withdrawals from their pensions at unsustainable rates. 

HMT and the FCA are hoping that by bridging the ‘advice gap’, either through guidance or a new regime, firms will have the confidence to give consumers the help they need to better handle their finances.

The Review reflects high-level proposals and early thinking at this stage. The proposals have not been provided in any order of preference and will likely evolve further based on stakeholder feedback. HMT and the FCA want to engage with stakeholders to define the features of the proposals, both in terms of how they meet consumer needs and how they enable firms to deliver services in a commercially viable manner. Increased use of new technologies (including ‘robo’-led models) is likely to play an important part in enabling firms to offer more accessible and affordable support to consumers.

Whatever the final outcome, firms are reminded that they will need to comply with the recently introduced Consumer Duty, focusing on client outcomes, and ensure they act in the best interests of their customers. In particular, the FCA noted its expectation in its Dear CEO letter on implementing the Consumer Duty in Consumer Investments that firms should not shy away from giving customers the support they need to deal with complex products or decisions simply because they are being overly cautious about getting close to the advice boundary. 

The deadline for comments on the discussion paper is 28 February 2024.