4 Types of advice
Introduction
59. There have been several attempts by the FSA
to classify the type of advice received by consumers. The following
extract provides a history of such efforts:
Until May 2005, [the] risks to consumer protection
were dealt with by the regulators through requirements that financial
advisers should either act as an agent of the consumer and recommend
products from across the market, or act as an agent of the provider
and recommend only the provider's products. The former group were
known as independent financial advisers and the latter were known
as tied agents. The requirement to be either an independent financial
adviser or a tied agent was known as polarisation. Under polarisation,
there was a requirement to safeguard against conflicts of interest
by means of the 'better than best' rule. This placed additional
requirements on independent financial advisers to prove a product
was the most suitable from the market if the product provider
had a financial stake in their business.
In June 2005, the market was 'depolarised', and these
restrictions were removed along with the 'better than best' rule.
Under depolarisation, options in the advice
market are likely to be harder for consumers to understand than
in the polarised advice market. Following depolarisation, advice
can be:
- Independent—the adviser considers products
from across the whole market and offers the consumer the choice
to pay by fee; or
- Whole of market—the adviser considers products
from across the whole market but does not offer an option to pay
entirely by fee and is remunerated, at least in part, by commission
payments from product providers; or
- Multi-tied—the adviser has a range of products
from different product providers that they advise on, but this
range will be less than the whole of market and could be as little
as products from two product providers; or
- Tied—the adviser sells the products of
one company only.[74]
60. The RDR seeks to once again change the classification
of the type of advice available. The Consumer Finance Education
Body set out the following overview of the different advice type
arrangements that will be present under the RDR:
The RDR proposes that firms that advise on retail
investment products must clearly describe their services as either
"independent" or "restricted".
To qualify as independent, firms must make recommendations
based on a comprehensive and fair analysis of the relevant market,
and to provide unbiased, unrestricted advice.
If advice is not independent, then it must be described
as restricted. This covers firms that advise on their own products
or on a limited range of products, such as bank advisers and other
single-tied and multi-tied adviser firms. Restricted advice also
covers:
— Basic advice—regulated advice on "Stakeholder"
savings and investment products using a process that involves
using pre-scripted questions. It was designed to deliver simple
products to people with straightforward needs.
—Simplified advice—an industry-designed
advice process to help people whose needs are relatively straightforward
access the market for investment products.
Also worth noting are non-advised services, or execution-only
sales. These are where a customer buys a product but no advice
or recommendation is given.
The final part of the landscape is generic advice—advice
that is not regulated but helps people to understand and manage
their money and take the right decisions based on their needs.[75]
Confusing to consumers?
61. Some of those who submitted evidence felt
the new system of advice definitions would be confusing to the
consumer. One of the most regularly cited concerns was that "restricted
advice" could actually mean two different things. It could
be restricted by provider (for example, a bank only offering its
own products), or it could be restricted by type of product (for
example, only providing advice on a particular type of retail
investment product, such as pensions). Some were concerned that
this may dissuade some consumers from seeking advice at all. Standard
Life set out one of the problems it foresees as follows:
It is important that consumers are given information
that goes beyond simple high level labels such as "independent"
and "restricted". While Standard Life understands the
rationale for these labels, we think there needs to be some flexibility
within the "restricted" category to capture the clear
difference between advisers that advise only on their own products
(ie tied) and those that essentially advise in a whole of market
manner but on a limited number of products. The risk with the
current labels is that consumers are discouraged from seeking
advice from a "restricted" adviser, when in reality
this may be beneficial for consumers without complex needs.[76]
However, the FSA again strongly defended its position.
Ms Nicoll stated that:
On restricted, again this is an area where we have
listened to comments that we have had in the sense that we do
recognise there will be different types of restricted advice,
so we recognise that there will be some advice that will be restricted,
for example, to the products of a single provider. There might
be other areas where their advice is restricted to a particular
range, so the firm may not, for example, give advice on life products
and only on collectives.[77]
But she felt that firms would be able to provided
descriptions to the consumer, to help them in understanding the
restriction. She noted that "We are not being prescriptive
in terms of what is meant by restricted and we are not being prescriptive
in terms of how a firm describes its services, so it will be able
to say, 'I am restricted but I specialise in a particular area
of activity'."[78]
62. We note the concerns raised
by some about change in how advice will be described, especially
around the 'restricted' label. We recommend that the FSA and other
relevant bodies provide significant resources to explaining to
the public the change, and in particular that 'restricted' may
mean restricted by product, or by firm.
Simplified advice
63. We had several submissions emphasising the
need for a simplified advice regime if the RDR were to proceed
as currently envisaged. In their written evidence, Cazenove Capital
Management explained why such a regime would be needed:
The removal of commission and factoring for regular
premium savers and lower income earners will mean it [is] no longer
economically viable for advisers to sell regular savings plans
or pensions to these individuals. If the FSA wishes to continue
with this approach, it must give a stronger lead on Simplified
Advice, or a large tranche of society will be left without financial
advice. This will be to the detriment of promoting a savings culture
in the UK.[79]
The British Bankers' Association set out for us in
their written evidence the essential design features of such a
service as they saw them:
We believe that "Simplified Advice" services
have potential to fill the advice gap for less affluent consumers
which we believe will result under the RDR.
This view is informed by the following features of
Simplified Advice:
—the service would satisfy straightforward
savings and investment needs and deliver extended customer access
with respect to these needs more cost effectively than full advice
services;
—average transaction size would be expected
to be lower than that for full advice services given the target
market;
—the service would be highly automated and
comprise a safe process for delivery of suitable, personal recommendations
of packaged retail investment, deposit or protection products
to customers with acceptable risks and safeguards, including recourse
to the Financial Ombudsman Service;
—service automation would help to keep costs
down for customers and as a result enable wider distribution than
we envisage under the new full advice model;
—Internet-based Simplified Advice offerings
could be accompanied by face to face and telephone services, where
staff would act as "facilitators" and have no discretion
to impact the personal recommendations generated by the model,
ensuring that consumer protections would be built into the model;
—professional qualification and training and
competence requirements for Simplified Advice facilitators should
be appropriate to the nature of the role; and
—service providers would ensure the appropriateness
of the products recommended in line with the FSA's guidance on
the responsibilities of providers and distributors for the fair
treatment of customers.[80]
64. There were however some notes of caution
over such a regime. Some were concerned that the simplified advice
regime would not be an adequate replacement for the loss of any
IFA capacity following the implementation of the RDR. Written
evidence submitted by J P Loveland, of Hanover de Broke Private
Clients LLP, noted that "It is not clear how consumers would
benefit from a simplified "mass market" approach to
advice and personal recommendations based only on a limited assessment
of a customer's financial circumstances generated by Banks if
that were to be the outcome of RDR".[81]
65. Despite support for simplified advice in
some quarters, AXA noted that "little progress has so far
been made".[82]
When we asked the FSA whether simplified advice would be available
by 2013, Mr Sants told us that:
To the general point, the answer is yes, we hope
so. We intend to make sure that certainly there aren't any regulatory
barriers to doing that. At the end of the day, it is the firms
that have to offer the service, not us, so that ultimately determines
whether the service is available. We completely agree, as you
have said, that this is a really important part of the overall
savings architecture.
We also agree, and are working with industry at the
moment on the point, that industry haven't yet got themselves
to a point of sufficient comfort in the regulatory environment
to be absolutely sure they can launch services that comply with
our rules. So we recognise we haven't completed that dialogue.
We have therefore accelerated our efforts in the last few months
to do that. We were literally having meetings as recently as last
week on the subject.
We committed recently, as you know, in response to
some of the earlier concerns, which this Committee is aware of,
to publishing a further paper in the summer—indeed, if we
can publish it a bit earlier, we will do so—in which we
would hope to give the firms, or we intend to give the firms,
there the necessary certainty they need in respect of the regulatory
questions to enable them to deliver the advice.
Assuming we are successful in that goal, and we think
we can be by the summer, then there would be enough time, we believe,
for the firms to get those services in the marketplace by the
deadline. So absolutely, the key priority for us at the moment.[83]
66. We note the concerns held
by some that simplified advice may simply replace the advice of
IFAs with an inferior advice system. Without a fully developed
system to allow analysis, it is not possible to know. We urge
the FSA to maintain the pace of its work towards a simplified
advice regime so that a competitive market can begin to operate.
We recommend that the FSA (and its successor the FCA) report to
us both on progress towards a simplified advice regime and, when
such a regime is put in place, update us on how implementation
has affected consumer outcomes.
74 Financial Services Authority, Depolarisation
Disclosure, Research report prepared for the Financial Services
Authority by GfK NOP, February 2008 Back
75
Ev w301-302 Back
76
Ev w225 Back
77
Q 26 Back
78
Ibid. Back
79
Ev w132 Back
80
Ev w234 Back
81
Ev w151 Back
82
Ev w199 Back
83
Ev 29 Back
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