Need to know. . . How will I benefit from planned changes to investment advice rules?

The UK financial regulator plans to help millions of Britons enter the world of investment for the first time.

The Financial Conduct Authority wants to make investment advice much more accessible because too many consumers have far too much of their savings in cash.

Savers lose out on potential investment returns and see their cash holdings decline in value due to high inflation.

But the ‘counsel gap’ in the UK is a big problem. Only a small minority of consumers seek professional advice on financial investments: for many, the cost of advice is a real deterrent.

The City regulator this week laid out plans to reduce the cost of advice given by human advisers to help more mass-market consumers get better returns on their savings using products such as stocks and shares individual savings accounts (Isas).

The FCA hopes a new simplified investment advice regime will be rolled out from early April 2024. After gathering feedback, it intends to finalize new rules in spring 2023.

Who can benefit from it?
Just 8 per cent of UK adults have taken financial advice in the past year. This worrying lack of guidance and help means that, according to FCA data, around 9.7 million UK consumers who have more than £10,000 in investable assets hold the majority (more than three quarters) or all of that money in cash, far more than what is necessary to cover possible emergencies.

Around 4.2 million of this group are believed to have a certain appetite for investment risk. Around 840,000 of these consumers could move some of their cash holdings into regular investment products as soon as 2025 if the FCA’s plans work as intended.

What will investors be offered?
Financial advice providers including banks, insurance companies, wealth managers and individual advisers will be able to offer advice on ordinary investments that can be held in tax-efficient shares and shares Isa. The amount that can be invested using the simplified advice regime will be £20,000, the current maximum annual Isa allowance.

But advisers are likely to face a challenge in defining an appropriate mix of investments for consumers who have historically shown little appetite for taking on more risk. Advisers will not be allowed to provide advice on riskier financial products, such as cryptocurrencies, mini-bonds, contracts for difference or other derivatives.

How much will it cost?
One of the most important proposals is that fees for advice should be paid in instalments, so that customers are not burdened by large upfront bills. Most consumers will be willing to pay up to 1 per cent for advice, or £100 on a £10,000 investment, according to the FCA. Currently, average advisor fees tend to vary between 1 percent and 3 percent of the investment sum.

Will financial advisers adopt the new regime?
The UK advisory industry is highly fragmented. Currently, 6,199 firms hold an “investment advice licence” from the FCA. But most are sole proprietorships, and 89 percent of these firms have five or fewer advisers. So they often lack the scale to take on large numbers of clients with only modest amounts of savings. As the price for consultancy is expected to be lower, this will also reduce revenue per client which may deter small consultancy providers. The FCA estimates that up to 100 firms – mainly larger companies – will offer the new simplified advice.

How has the financial advice industry responded?
The proposals have been well received by providers of investment advice, but with some reservations.

“It is encouraging that the FCA has recognized that the regulations should be adapted to make simplified advice available to a large section of the population whose financial circumstances are typically less complex,” said Jason Hollands, chief executive of Bestinvest, the online investment platform.

Andrew Shepherd, chief executive of wealth manager Brooks Macdonald, said a simplified regime was essential to address the advice gap. “The challenge will be to ensure that the requirements are not so complex that they deter customers and advisers from participating.”

Tom McPhail, director of public affairs at consultancy Lang Cat, said he doubted whether the FCA’s proposals would appeal to many firms.

“Offering a simpler, affordable advice process risks harming existing advice models as well as risking harm to the consumer if the customer opts out of the entire advice process,” McPhail said.

Leave a Reply

Your email address will not be published. Required fields are marked *