FCA publishes discussion paper on advice boundary

The FCA has published a discussion paper containing important proposals in respect of the advice regulatory framework. If introduced, the regime could provide greater clarity and reassurance to firms offering support to consumers who are wary of coming too close to the personal recommendation boundary. This is important in light of increased regulatory requirements brought about by the Consumer Duty (please see our briefing here) . 

Key points

• We are still in the early stages, and the FCA expects for the regime to be updated and refined in light of feedback from stakeholders. The closing date for comments is 28 February 2024.
• The paper sets out a three-pronged advice regime with varying requirements to complement existing support firms give to consumers so that they have greater levels of support when making financial decisions:  clarification on the advice boundary; targeted support; and simplified advice.
• Further clarifying the advice boundary involves giving FCA-authorised firms greater certainty (either via further guidance or simplifying existing guidance) to provide more support to consumers without providing a personal recommendation under existing rules.

Targeted support would involve a new framework under which firms can widen the support they can provide to consumers. This would not involve explicit charges (i.e. without upfront fees relating exclusively to providing targeted support) and would involve suggesting products/courses of action based on the consumer's target market ("people like you" as the FCA terms it), as opposed to fully individualised support.

Simplified advice regime builds on the FCA Consultation Paper "Broadening access to financial advice for mainstream investments" (CP22/24) which set out plans to provide one-off investment advice to consumers. The aim is to set out a cost-effective regime for supporting consumers who want to receive a personal recommendation when making a financial decision.

Background

Since 2018, the Regulated Activities Order has distinguished between advice that is a personal recommendation and other forms of advice, with the FCA publishing perimeter guidance to help firms understand the boundary in PERG 8 Annex 1. The amendment means that firms are exempt from the need to hold a permission to advise on investments unless providing a personal recommendation. Since then, there have been a number of regulatory changes, as well as reviews into the existing advice framework (including the 2020 evaluation of the  Financial Advice Market Review ), which are also linked to the proposals set out in the discussion paper. 

The FCA's Consumer Investments Strategy, launched in September 2021, set out ways to address the key harms in the consumer investment market. Under the Consumer Duty, firms are required to enable and support retail customers to pursue their financial objectives (PRIN 2A.2.14R) and avoid causing (by act or omission) foreseeable harm to retail customers (PRIN 2A.2.8R and PRIN 2A.2.9R).

The Government announced a review of the advice guidance boundary as part of the December 2022 Edinburgh Reforms (see Ashurst briefing). It also set out details for replacing UK PRIIPs with a disclosure regime more suited to the UK market, and also provided details in relation to Smarter Regulatory Framework (SRF). The SRF seeks to create a more streamlined and accessible regime by replacing retained EU law (such as the UK MIFID framework) with firm-facing rules set by UK regulators. The FCA has since published a discussion paper on the disclosure regime to replace UK PRIIPs, as well as a consultation on advice and guidance on the advice boundary.

Proposal 1: Further clarifying the boundary

The FCA is looking to give firms it perceives as overly cautious more confidence to operate closer to the boundary, and provide consumers with a greater level of support.  The FCA notes that some firms surveyed are currently only providing basic generic information, owing to fear that doing so would result in a personal recommendation. This has become more pertinent in light of the requirements introduced by the Consumer Duty and associated requirements concerning providing support for customers. This would follow the FCA's August 2023 guidance on providing support to customers. 

There would be no explicit charge incurred for the provision of this service. Ways of enhancing certainty for firms include: using non-handbook and Perimeter guidance to outline scenarios of consumer support that would not count as a personal recommendation; simplifying existing guidance to provide greater clarity to firms that they are not giving a personal recommendation.

Proposal 2: Targeted support

Under this framework, firms would use limited information to suggest products/courses of action appropriate to a person in similar circumstances (a target market the consumer can be identified as belonging to). This could result in the firm suggesting options to the consumer on the basis of what the FCA terms "people like you". There would be no explicit charge. As targeted support would work in a different way to simplified or holistic advice, firms would be able to: use limited personal information about a customer and their circumstances to provide support to consumers and help them make an informed decision; and offer targeted support without explicit charges, but with disclosure of how a consumer is paying for the service through associated charges.

Key points include the following:

• The regime would allow a firm to determine whether a consumer falls within a target market and ensure that the suggestion made aligns with this. Consumers would need to understand what targeted support is and how is differs from simplified or holistic advice, especially that it is not a recommendation on a individually personalised level.
• Although of a different standard to holistic and simplified advice, firms providing targeted support would still need to provide it to a high standard. Examples provided by the FCA include: highlighting to a customer with a sum of money in bank account that investments provide a chance of higher returns (but with a risk of capital loss) when inflation is higher than interest rates: a platform firm suggesting to a customer who has invested in a tracker fund that cheaper alternatives following a similar index or sector are available; and presenting alternative funds (with an asset allocation aligning with needs, characteristics and objectives of customer target market) to a customer with an investment fund with 20% equities and 80% bonds.
• In terms of the Consumer Duty, firms would also need to determine the extent of the information to be collected from their client to deliver targeted support. Firms would need determine whether the support they provide is likely to provide a better outcome (i.e. those discussed under the Consumer Duty) for customers than would reasonably be expected if the customer did not receive targeted support; and that the customer can understand the outcome that the suggestion is intended, but not guaranteed, to achieve (as well as associated risks).
• The FCA is seeking to ensure a robust product governance framework by building on the existing framework for a target market in the FCA’s PROD sourcebook (e.g. "target market" product governance rules set out in PROD 6 for Investment Pathways and the use of PROD 4 for default investment options) and in the Consumer Duty framework. This would ensure that when a firm makes a suggestion, it meets the needs, characteristics and objectives of the identified target market, while also recognising the consumer has individual needs that have not been identified.
• The FCA suggests that firms could recover costs for providing targeted support to customers by: cross-subsidising targeted support service from other services provided by the firm as part of their broader proposition (e.g. product charges, platform charges); and charging a fee, as a standalone service or embedded into existing propositions. Remuneration via commission payments would still be prohibited under the targeted support regime.
• The FCA is proposing that relevant disclosures under the proposed regime should support the consumer’s understanding that targeted support will not identify all individual needs and instead is based on a target market approach. Suggested areas to be covered by consumer disclosures include confirming the following: the service would not provide independent advice; the service would offer a "suggestion" not a "recommendation" to the customer; the data to be collected by the firm is limited and is aimed at establishing if the customer falls within target market; and the nature of the suggestion (i.e. that it would not be a recommendation).
• The FCA suggests that the targeted support regime could be delivered by: introducing a new regulated activity; creating a new sub-permission within the current "advising on investments" activity in Article 53 of the RAO; and allowing FCA-authorised firms to carry out targeted support where they have certain existing permissions linked to relevant products.

Simplified advice

This builds on feedback from the FCA's November 2022 consultation paper on initial proposals for a new simplified advice regime consisting of a new core investment advice for Stocks and Shares ISA (limited to the value of annual ISA subscription allowance i.e. £20,000). The framework would enable firms to provide a simplified form of advice, taking into account only relevant information about a specific consumer need. The form of support would be presented as being suitable for the specific consumer and would result in a personal recommendation. 

Key aspects of the regime include:

• Simplified advice would result in a recommendation personalised to an individual consumer’s circumstances – i.e. "you specifically" would benefit from this action.
• It is a one-off service, whereby the firm would take into account only relevant information about a specific consumer need. The simplified advice regime could also provide for firms to give repeated instances of transactional advice to a customer, but would exclude ongoing and periodic review services.
• Possible scenarios suggested by the FCA include: providing a personal recommendation to consumer with a lump sum saved in deposit accounts seeking to invest for the long term, targeting growth in excess of inflation and cash interest rates (the advice is personal to them, at that point of time, and on this specific need); and reviewing a fund and recommending suitable alternatives for a consumer, with a changed attitude to risk, who has never reviewed the fund they have invested in.
• In addition to Stocks and Shares ISAs, the FCA is proposing that: wealth accumulation products be in scope of the regime; all pension decumulation decisions be excluded; and the upper limit for receiving simplified advice be increased to £85,000.