Spotlight on the FCA’s four Consumer Duty’s outcomes.
Outcome 1: products and services
After a YouGov poll earlier this year revealed just 8% of UK adults regularly engage a financial advisor, steps are being taken to address the growing “advice gap”. Of course, the focus for the Government and the FCA is firmly on the barriers to accessing financial advice – primarily, the affordability of advice and the provision of services among less affluent consumers. After all, research undertaken by the consumer group Which?, based on a sample of 1000 potential investors, has shown that 58 per cent of people deem financial advice as too expensive. We explore the different perspectives on plugging the advice gap, with particular focus on the increase in the automation of advice.
Despite tackling the issues of adviser qualifications and their conflicts of interest, the implementation of the Retail Distribution Review (RDR) in 2012, with its removal of commission-based remuneration structures, has often been blamed for pricing certain consumer segments out of the advice market. The Financial Advice Market Review (FAMR) is the most significant step taken since RDR towards addressing this issue, and it includes a total of 28 recommendations that fall broadly into three key areas: affordability, accessibility, and liabilities/consumer redress.
Technology is one key way of bridging the advice gap for those with moderate assets. One of the primary developments arising from FAMR is the FCA’s ‘Advice Unit’, which provides resources and individual feedback to support firms in creating automated ‘robo-advice models, with the aim of delivering cost-effective, accessible and transparent options for the consumer. To date, there have been nine businesses selected to receive support from the unit.
Indeed, activity in the robo-advice market has increased significantly in 2016. Firms such as Destination Financial Planning, Simply EQ and Wealth Wizards are offering financial advice either face-to-face, over the phone or over the internet. In addition, intermediaries such as Horizon Financial Solutions are utilising apps to help customers understand and engage with the process, and offering tips on how to secure lending. Nutmeg remains a key player in the UK market, having recently developed their zero-fee online service. Although the FCA are clearly encouraging innovation in this area, Nutmeg’s development certainly poses some interesting questions in terms of regulation: some in the industry have commented that these business models are simply not viable, and indeed it could appear to directly conflict with the FCA’s competition mandate.
Despite these developments, it is clear that firms seeking to develop and deploy automated advice solutions are still encountering roadblocks – a significant barrier being customer inertia and lack of trust. For example, a recent survey suggested that over half of millennials, despite often pigeonholed as ‘digital natives’ and largely embracing established online financial guidance tools such as price comparison sites, would expect some form of personal contact for large financial decisions such as mortgages.
This raises the question of whether developers currently have a sufficient understanding of retail clients and their needs. For the automated process to work appropriately, it will need to contain a number of kick-outs where, depending on customer responses, the advice proposition is no longer suitable. However, if the number of kick-outs is too low it will struggle to be compliant; too many and the advice proposition struggles to be commercially viable, unless the firm develops an ancillary offering too. A fine balance needs to be struck.
As such, key figures in the robo-advice arena have commented that although robo-advice is necessary for plugging the advice gap, ‘off-the-shelf’ products are not the answer. Market leader Nutmeg have also suggested that the hybrid models, whereby automated guidance runs alongside personal advice, currently available in the market may be necessary to improve uptake, and make way for fully-automated systems. Relatively new market entrants such as Scalable have suggested the rise of a second generation of robo-advisors is imminent, due in part to the wider availability and lower costs of cloud-based computing. With specific reference to investment markets, this level of computing capability offers the personalisation previously only available to investors with the assets to afford a private wealth manager. However, whether firms are developing a complementary advice proposition or support or guidance, it is likely that standalone robo-advice propositions will either experience low conversion rates or result in poor customer outcomes.
As the market starts to mature the debate around how these tools should be treated for regulatory purposes increases. The primary concern is that firms operating in this arena are treading a fine line between regulated financial advice and unregulated financial guidance. FAMR found the current UK definition of advice of ‘advising on investments’ to be too broad, and as a result of the subsequent uncertainty around its scope, firms are limiting their guidance services. It is hoped that the feedback from Treasury’s consultation to align the UK’s definition of advice on investments with that of the EU’s definition set out in the Markets in Financial Instruments Directive (MiFID) will provide some clarity to robo-advice developers. A move towards the EU definition would mean ‘regulated advice’ only applying to scenarios where a customer has been offered a personal recommendation for a specific product, and therefore enabling firms to provide more tailored online support to customers without the burden of additional regulatory costs. In time, this could well see an increase in firms developing online guided sales processes.
There are also concerns over the quality of advice available, in relation to improving customer knowledge around their investment behaviour, and providing a holistic assessment of a customer’s overall portfolio. Firms such as Veracity are putting the focus on the customers’ existing portfolio as opposed to pushing for new investments. They claim that with the appropriate level of analysis, much of a customer’s portfolio could be transferred to products that better suit their current attitude to risk or that offer better value.
With the FAMR working group now in place, the FCA and HMT will continue to work closely to develop market indicators to report on progress, and it is likely we’ll see the full delivery of FAMR’s outcomes in 2019. Despite the significant hurdles in achieving a fully-automated advice service that, most importantly, customers are willing to invest in, it is clear that robo-advice and FinTech will continue to play a large part in delivering those outcomes.