Cutting the Cost of Advice
Britain’s financial regulator, the Financial Conduct Authority (FCA), has said that there is a ‘clear need for regulatory intervention’ to reduce the cost of financial advice and make it more accessible – core tenets of the government’s 2012 Retail Distribution Review that have so far failed to materialise.
It is to encourage the development of automated advice platforms – dubbed ‘robo’ advisers in the US, where a large number already exist – in order to cut the cost of financial advice for less well-heeled consumers.
FCA has said that robo advice would be subject to the same regulatory protection as face-to-face advice, but would be cheaper and more consistent for customers and would boost innovation in the financial technology – ‘fintech’ – sector.
It has also called upon the government to allow consumers to access a small part of their pension pot to pay for pre-retirement advice 5-10 years before they retire.
It is estimated that more than five million people in Britain are in the so-called ‘advice gap’ – unwilling or unable to pay for advice – and at least a million people in relatively uncomplicated circumstances could get basic financial guidance from an automated service.
‘more than five million people in Britain are in the so-called ‘advice gap’’
Robo advice is incipient in the UK with less than a billion pounds of assets under management, whereas in the US there is almost $20 billion held on automated advice platforms and stiff price competition.
A number of banks that withdrew from offering financial advice following expensive miss-selling scandals are looking to re-enter the market with automated services and the FCA is looking to establish a unit to help these companies develop their proposition.
The proposal to give employees early access to their pensions to fund advice is part of the FCA strategy to create a more clearly defined two-tier market, with ‘advice’ on investments continuing to be strictly regulated, but with general ‘guidance’ which does not include a full fact-find about the customer, more lightly regulated.
Under this initiative, advice is defined as a ‘personal recommendation’, with a clear delineation between advice and guidance which aligns Britain with EU law.
Public consultation on developing ‘streamlined’ advice is planned with the overall objective of delivering high quality and affordable advice; the transparency around charges delivered by RDR, which saw commission replaced by fees, will remain in the brave new world of cyber-advisers.