What price advice?
Following a recommendation of the Financial Advice Market Review (FAMR) last March, HM Treasury (HMT) has proposed a radical redefinition of "regulated advice".
The intended result is that consumers will receive "regulated advice" only when they are offered a personal recommendation for a specific 'product'.
This is much narrower than the current definition, in Article 53 of the Regulated Activities Order, which relates to advising on investments.
The objective is to remove confusion by aligning the definition of regulated advice with the EU MiFID (Markets in Financial Instruments Directive) definition.
FAMR found that the MiFID definition is clearer for firms and customers and is also much easier for firms to build into their compliance processes.
FAMR also found reasons why some consumers do not want financial advice: chiefly cost, unwillingness to pay and preferring to make their own investment decisions.
Although they could benefit from good, potentially cheaper financial guidance to help them make informed decisions, FAMR found that the unclear regulatory parameters meant firms were only providing simple financial guidance to these individuals, to remove the risk of straying into the regulated sphere.
After the change, HMT feels firms will be able to give more tailored information and guidance, to better serve customers without incurring additional regulatory costs.
If anything that stops short of a personal recommendation to invest in a particular 'product' can be treated as guidance, rather than advice, the shackles are off.
So far, so good. However, some have criticised the proposed change for failing to adequately clarify the distinction between advice and guidance.
The HMT consultation document acknowledges that currently, very few firms charge consumers to use their guidance services.
With the ability to provide more advanced guidance, some firms may begin to charge for the use of such services.
If an individual is asking questions and receiving answers, they might see it as advice – especially if they are being charged.
Perhaps the crucial difference is between guidance as the options available, and advice as which particular option is best for them.
It is all too easy though, for options to be presented in such a way that the individual is left in little doubt about which their informant favours.
HMT also recognizes that moving the regulatory boundary will enable some firms to provide guidance services, for which they currently require authorisation, without being authorised.
If they stop short of recommending a 'regulated product' though, HMT considers the risk to consumers will be acceptably low.
The proposed change to the definition of advice will liberate firms to offer more to clients, at a potentially lower cost.
But clients will still have to put their hand in their pocket – which they don't want to do, as the FAMR found.
In January 2014, I wrote here on PFO about the need for change, noting that one thing which really does make a difference to cost is scale.
Few people are financial experts, just as few are really knowledgeable about medical treatment.
I argued that a National Wealth Service (NWS), analogous to the National Health Service, with competent salaried advisers could help channel individuals in the right direction for each one.
I went on to suggest there was an opportunity here for the Government to make something of the much-maligned Money Advice Service (MAS).
In this year's Budget, the Government promised to restructure the statutory public financial guidance providers – MAS, The Pensions Advisory Service (TPAS) and Pension Wise – to create a new pensions guidance body and a new "slimmed down" money guidance body.
This week, the Government moved a step further to setting up the kind of NWS I proposed, with an announcement instead of a new all-in-one single body to deliver public financial guidance.
Written by Ian Neale,Director, Aries Insight.