AMI Senior Policy Adviser Stacy Penn discusses the Perception Gap in the protection market, in this article originally published in Moneyfacts…
The FCA recently issued a call for input to look at where the consumer investment advice market is not working well and to seek views on what changes can be made to improve the protections and outcomes.
On the face of it this seems a very straightforward and sensible thing for the FCA to do. However in this paper they are looking for ideas on, amongst other matters, how they might enable firms to undertake non-advised activity, the impact of scams, losses and bad advice on the costs of the Financial Services Compensation Scheme including can we get the “polluter” to pay, how well the Appointed Representative system is working and making it easier for new technology based entrants to compete.
It is wrong that these issues have been solely addressed at the investment market as any remedies in these specific areas are likely to have significant impacts on both the mortgage and insurance intermediary markets. Indeed, most of the changes would be introduced through the part of the FCA rule book known as “Perimeter Guidance” which impacts all markets. It is unfortunate that this paper has not been more widely “flagged” for debate.
The mass market
The FCA would like to see a broader range of services more widely available to consumers. It suggests that most people’s financial needs are likely to be relatively straightforward and that simpler products and clearer labelling could help. It acknowledges that past efforts on this have failed to engage consumers, but resurrects the idea of a traffic light system and/or a more outcomes-focussed approach from firms to ensure that customers understand the products they choose.
Where people with straightforward needs require help to decide, the FCA suggests that financial guidance models could be used without giving personalised advice. Growth in this area is ‘frustratingly slow’ as firms are worried about costs and liabilities if later their model is deemed to have given a personal recommendation.
The FCA appears to want a market where people can benefit from buying directly but with safeguards to ensure consumers can invest with confidence. This may mean more obligations on distributors using on-line platforms. This looks like a charter for chancers as responsible firms who believe in proper advice stay far away.
The FCA is concerned that many investors believe they will be protected and get redress if their investment fails, but this might not be the case, even with legitimate investments.
People build their understanding of the regulatory protections behind a possible investment through the information that they are given at the start and financial promotions are an important part of this. The government’s proposed new approach may mean that when granting consent for firms to approve the promotions of unauthorised firms, the consent should be limited to products within a firm’s experience, skills or expertise.
It’s important to think about the protections people have where things go wrong because of regulated companies’ actions, and who pays for these. If more advice is suitable, fewer people will need redress. Firms are required to hold capital to cover their liabilities, such as unsuitable advice. However, the current level is not enough to cover the cost of bad advice if it is more than a one off.
The FCA is looking to take a more preventative approach to consumer investments. It does not want to review the distribution of FSCS costs but does want to consider how to have a system where firms which cause harm pay more of the bill before recourse is needed to a scheme of last resort. Fine words but so hard to apply. When this was proposed on FOS costs they responded that the administration costs would be prohibitive.
The FCA states that following reviews into the use of the AR regime that it had concerns about the principal model in some sectors with shortcomings and some significant weaknesses in the control and oversight of ARs. They stopped certain authorised firms from acting as principals and asked them to end their relationship with certain ARs. They wrote to the CEOs of authorised firms acting as principals in the investment management sector to set out their expectations. They are now looking for further input on whether this model works.
Competition and innovation
The FCA is concerned that it is not seeing all of the potential benefits from new technologies being translated into better products and services for consumers.
FCA recognises that innovation must be in the interests of consumers. It is aware of the risk that as firms try new things not all of them work, and that new technology can introduce new risks and things to keep an eye on. FCA is asking for views on how to help the right kind of innovation to assist people wanting to invest safely.
Whilst not specifically related to the mortgage market, any decisions taken following this call for input will have implications across the sector.
The encouragement of firms to provide guidance rather than advice has echoes of the recent changes on mortgage advice and selling standards. It seems strange to be advocating this approach or a pay as you go approach where advice is not provided on an ongoing basis with no regard to investment plans or products changing over time. Where consumers are steered, they feel they have had advice and this risks muddying the waters.
Any consultation on either the Financial Services Compensation Scheme or the Appointed Representatives regime will affect all sectors of the industry and it is wrong that the regulator is only putting these questions to the investment industry.
It is perverse that the FCA fails to recognise that their RDR market intervention moved the advice industry away from the mass affluent into more specialised high net worth. Their prior efforts to simplify products or advice processes have not gained traction and this looks like a new set of regulators potentially re-inventing the wheel. The continued attempt to dilute advice into “guidance” rather than the clarity of information provision or non-advised risks is continuing to mask the real issues that lead to escalating FSCS costs.
This debate needs to be on a much bigger stage with all the market involved in the race to answers.
Chief Executive, AMI