The future of financial regulation: an interview with the FCA

0:00Amy Austin: Hello and welcome to a special edition of the FT Advisor podcast where we will be joined by the FCA to talk about their latest consultation on simplified advice. I'm Amy Austin, News Editor at FT Advisor and joining me today is Kate Blatchford-Hick who is the Head of Consumer Investments Policy and Market Analysis at the Financial Conduct Authority. So, Kate, let's get into it. We've got trail commission. We've got simplified advice. We've got, you know, advisor qualifications, suitability reviews. There's a lot, a lot in this consultation. So I thought maybe we could start by thinking about, you know, back in August 2023, the FCA did kind of pause its thinking about simplified advice.

0:47Amy Austin: So what is different this time around? Well, thanks, Amy. Thanks for having me on your podcast. You're right. In 2023, we did step back from introducing a standalone simplified advice regime. The reason for that was quite clear. Industry wasn't behind the model that we put forward. They felt the approach was too rigid and a limited product range wouldn't allow firms to deliver the services in a commercially viable way. So we instead developed the targeted support regime that will launch next month. The rules will go live. Through targeted support, firms will be able to offer suggestions to groups of consumers based on their common financial services support needs.

1:34We see the targeted support regime as having huge potential, potential to reach millions of customers to help them with the support that they need. But we do recognise that some consumers need something that's more tailored, more personalised to them. so that's why we are taking forward the consultation to simplify the pensions and investment advice rules. We want to see advice both on a limited scope one-off basis but also on an ongoing basis and we've set up proposals to support firms delivering both those types of service.

2:12Amy Austin: And how important is it then that advice firms do get on board and what level of engagement do you kind of want to see from them? So it's really important that we engage with a wide range of firms through this consultation to ensure that we have got the proposals in the right place. We can't force firms to come to the market, but what we really can do is make sure that they are facing a regulatory environment that is clear, that is consistent and builds their confidence to offer the services in line with our expectations. So that's why we're setting out the proposals in our consultation today.

2:48We are also working really closely with the Financial Ombudsman Service. We know that the collaboration between the FCA and FOS is really important to give firms that clarity of expectation. You'll also see in the consultation that we're committing to publishing some case studies later in the year. That again, we see as helping firms to build that confidence to offer more simple forms of advice. So we see ourselves as creating the conditions and the regulatory environment that will allow firms to then come to market and offer the types of services that we would like to see.

3:22Amy Austin: Yeah and I think case studies I think advisors always appreciate that just so they can see you know what's good what's bad what should we be doing and when you know looking at simplified advice alongside targeted support how will they kind of interact with each other and like will those offering targeted support maybe you know be like you know this is targeted support but we may suggest you know why not do simplified advice have a have a talk to an advisor? Is that what you kind of see happening? So we see targeted support and simple forms of advice as being incredibly complementary to one another.

3:54So it may be the case that a firm that is offering targeted support can see that there are cohorts of their consumers who might need an advice service that is more tailored, more individualised. So they may feel like offering a simple form of advice is a natural stepping stone for a consumer on that particular journey. We also would see financial advice firms that are offering more comprehensive forms of advice, entering and offering simple forms of advice as well. So we see a lot of potential for this type of business model across the sector.

4:28Amy Austin: Yeah, so it would be like a whole kind of advice journey, target support simplified for advice. And that's kind of will cover all consumer bases, I'm guessing. We certainly hope so. Fingers crossed. So let's look at the details of this regime then. So in an ideal world, which products will simplified advice be most suitable for in practice? I think really importantly, there are no set boundaries in the regulatory framework to determine the situations in which more simple forms of advice and more comprehensive forms of advice should be offered. The nature and the scope of advice can absolutely vary.

5:07It's one set of rules across the whole of that sector. but broadly where a situation is more straightforward where the firm is envisaging making a recommendation about a product that's more mainstream then a firm can take into account less information than if they're wanting to recommend a more complex product or consider more of a consumer's more complex circumstances. So what's really important is the approach is proportionate to the needs that that consumer has. If a consumer has a narrow objective, then a firm can absolutely take a narrow approach to the information that is considered. What you'll see in the consultation are a number of examples where a firm might want to offer more of a simple form of advice.

5:55For example, investing a modest sum in a diversified stocks and shares ISA or someone wanting to start investing in a pension. Those situations are more straightforward. The recommendations are going to be more mainstream. And in those sorts of scenarios, a firm may want to consider just sufficient information rather than conducting a full fat fine that would be appropriate for a more of a complex situation. Sure.

6:21Amy Austin: And then looking at these products, is it kind of you wanting, you know, people that have maybe a lower asset base, which, you know, your full fat advisors might not want to. It's not worth their time, to put it politely, to kind of look after them. Is it to try and get them more people to get into this advice journey? Yeah, so that is absolutely where we see that there is an advice gap at the moment. Consumers that have smaller pots of money, that have more straightforward financial services support needs, at the moment they are underserved in the market. So through the targeted support regime, as well as the consultation that we're sending out today, we really hope to see more support for those types of consumers in those sorts of situations.

7:01Sure.

7:03Amy Austin: And let's look at fees. So how affordable do you think it's going to be for advisors to, you know, provide the simplified advice? Because I guess this is one of the big barriers out there at the moment. So we absolutely recognise that one of the factors that drives and advises cost space is the regulatory costs, the regulatory overheads. And at the moment, we know that some firms feel an obligation to conduct a full fat find and produce quite defensive suitability reports, even when they're offering a form of simple advice. And that can make it quite expensive to recommend in that area. So the changes in the consultation are trying to directly tackle some of those cost drivers.

7:45One way in which we're doing that is bringing all of the rules together into a single chapter in our handbook. That should make it easier for firms to navigate and to understand the expectations. You'll see that we're stripping out quite a lot of the complexity in the rules as well and relying a lot more on the consumer duty. Again, that should reduce the costs that firms incur in terms of understanding our expectations. And then the actual proposals that we're setting forward, the aim there is really to make sure that it's not the suitability rules that are driving up costs for firms. We think the combination of that plus firms using technology in innovative ways should make it possible for firms to offer simple forms of advice on an affordable basis.

8:32Amy Austin: Sure. So I know, I mean, we've heard the FCA say it quite a lot of times, but you're obviously not a price regulator. You don't set prices. But are you going to expect, you know, firms to, you know, think about this and offer simplified advice at a lot of cost base? Yeah. So I think, yeah, really important to just clarify that there are no plans to set any price controls in this market. We expect competition alongside the consumer duty to drive appropriate pricing outcomes for consumers. For that to happen, though, it is really important that firms can tell consumers what they're going to be getting so that they can shop around, but also review whether or not the services meet their needs on an ongoing basis as well.

9:17So, yeah, so no plans to have any prices. Yeah.

9:22Amy Austin: And, you know, with this kind of landmark, I guess, I think we could call it, you know, consultation that came out. There was a lot in there. You know, there was even things about looking at ongoing advice as well. And, you know, the FCA are maybe proposing to kind of get rid of the annual review requirement. So will there be an obligation on advisors who are offering simplified advice to, you know, visit this maybe one off advice as well? So I think important to be really clear here that if an advisor is offering advice on a one-off basis where there's no ongoing fees or no continuation of the services, there's no requirement for that advisor to go back and proactively revisit the suitability of the recommendations once that transaction is being completed.

10:11And we're not changing the position on that. What we are proposing to do, though, through the consultation is that if a client does agree to pay for an ongoing service, we are proposing to change the rules so that the advisor wouldn't necessarily have to offer an annual suitability assessment. Instead, they can take the opportunity of more freedom in our rules to design an ongoing service in a way that they think meets their customer needs. That would be underpinned by the consumer duty. So they would have to assure both themselves, us as the regulator and their customer that that ongoing service is providing fair value.

10:51Amy Austin: And is this kind of how you're going to place it? Will you be looking out for firms who maybe think, oh, it's fine, I'll just revisit this in like four years time, which is obviously not helpful. Yeah, so absolutely. So we are very much thinking through what the supervisory strategy will be to support these changes if we take them forward after the consultation. That approach would be proportionate, of course, but absolutely in line with the way in which we're regulating for the consumer duty. Yeah. And did you kind of speak to advisors about this? Was, you know, kind of getting rid of the annual review something that they were quite happy to do?

11:25So we have done lots of industry engagement right the way through our advice guidance boundary review work. We really hope that the proposals that we set out today are welcomed by the industry and that they can see the opportunity to seize these reforms and really innovate in the interests of consumers. As we take the consultation forward, there'll be plenty of opportunity for engagement with industry and we really welcome views and perspectives.

11:54Amy Austin: Yeah, because they are only proposals, I guess, at the moment. You know, you need to hear back from all the stakeholders and people that actually do offer this kind of advice. We have started to, you know, get comments coming through, you know, since the consultation has been released. And there was concerns slightly that moving away from yearly annual suitability reviews, they say it might harm, you know, like client engagement. You know, they might not be speaking to clients as much. Was this a concern or do you think that actually, do you know what, if you're an advisor, you will be wanting to talk to your clients, you know, keep them up to date, especially in the climate that we're in as well.

12:28So what's really important in terms of the proposals is that there will be judgment on the part of the firm. So if a firm thinks that they are serving a group of consumers for which an annual suitability review remains appropriate and what that customer needs, then that is absolutely the sort of service that they should be offering. If on the other hand, they think that there's a group of consumers for which their portfolio doesn't need to be reviewed annually then they would reflect that in the business model and there would hopefully be a commensurate reflection in the cost of that service as well.

13:01Amy Austin: Looking at simplified advice you know we kind of can't really look at it without bringing the FOS as you mentioned earlier into it. How are the how is the FOS going to maybe look at you know these simplified advice cases that might come through because you know there are always complaints? Yeah, so we absolutely recognise that close collaboration between the regulator and our colleagues at the Ombudsman is really important. We need to make sure that there is alignment in terms of expectations and common understanding of what the rules do and do not expect of firms. That's why we've worked really closely with our colleagues at the Ombudsman service through the policy development to ensure that there is that shared understanding of how the existing framework can flex and how it's intended to operate in practice.

13:51We'll continue that engagement as we take the work forward and in particular we'll be working on the case studies with our colleagues at the FOS as well.

14:00Amy Austin: And as well as I say it was a big consultation there was also trial commission in there as well which I mean haven't heard of that for a little while yet. I know the FCA aren't making any changes here but why did you kind of want to look at that now, you know, along with the simplified advice stuff? Yeah, so we see the advice guidance boundary review as a once in a generation opportunity to really modernise the handbook to make sure that the rules are on a sure footing for the future. And so it's in that context, we are taking a look at the rules that allow for legacy trail commission. I think really important that this is a discussion chapter in our consultation we really want to gather evidence and a range of views to understand the impact that trail commission has on consumer outcomes on firms and on the market more generally before we take any decisions about whether or not we need to do anything further.

15:00Amy Austin: Yeah I mean that's the thing it's all quite nicely packaged together in the consultation I think and just to finish up you know you have been kind of looking at advice I say you the FCA has been looking at advice for 15 years now, you know, since RDR and everything. Do you feel like now maybe the FCA has like cracked the advice profession? Are we in a good spot? So we certainly see the advice guidance boundary review reforms as this once in a generation shift, really closing down that advice and support gap that we see in the market. We think once targeted support has come to market, as well as once we've seen this consultation through, that should really put the sector on a sure footing for the future.

15:46We do have one more piece of policy work to do, which is to update our perimeter guidance. But once we've done that, we think we've got a reasonably complete package for the sector.

15:58Amy Austin: Great. Well, Kate, thank you so much for coming in today. It's been great talking to you and hearing all about the FSA's plans for simplified advice. Thank you very much. Thank you all for tuning in to this special edition of the FT Advisor podcast, and we will see you all soon.

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