While it may seem a subtle change, the Treasury’s recent decision to align the definition of regulated advice with the EU's Markets in Financial Instruments directive (Mifid II) will offer a number of benefits to both consumers and the financial advice sector.
By narrowing the definition of regulated advice the Treasury has, in effect, broadened the scope of guidance, which is not subject to the same level of regulatory oversight.
It is important to point out the Treasury has listened to the concerns of the Personal Finance Society and others in the sector, and has limited application of the new definition to regulated firms.
Only regulated firms will be able to provide ‘more detailed and tailored guidance services’, thereby mitigating the risk of consumers being scammed.
Without this safeguard, it would have been possible for an unregulated firm to influence an individual into making a risky investment, while escaping regulatory scrutiny by stopping short of offering a personal recommendation.
Many regulated firms have been apprehensive about offering guidance services because there has been uncertainty over the distinction between guidance and advice. But, by clarifying the boundary, the Treasury has provided greater certainty to allow firms to be confident in the development of their guidance services.
It is pleasing the Financial Conduct Authority (FCA) and Treasury have agreed firms need clarity on the regulatory responsibilities underpinning the development and delivery of guidance services. It is also pleasing it will produce new guidance to support firms offering services that help consumers make their own investment decisions.
Providing illustrative case studies highlighting the main considerations firms need to take into account when developing such services, as it has promised to do, will be welcomed by the sector.
An expansion of guidance services will potentially lead to improved access for consumers seeking entry-level or less complex forms of advice. This could help close the advice gap and lead to consumers making better informed decisions about their personal finances.
Extended guidance services could also assist firms that wish to introduce much needed new blood into the sector. It is widely recognised there is a very real and ongoing risk of future skills shortages in our sector, and an evident need for succession planning.
A current barrier for new talent joining the financial advice profession is the extensive training and qualifications required to deliver full regulated advice. But many potential recruits could be eased into the advice profession by training them up to an appropriate level to offer guidance on less complex savings and investment needs.
There are many expected benefits resulting from the new definitions. But they will only materialise if the Treasury, FCA and wider financial services community are able to educate consumers about what the new definitions mean in a practical sense.
Until then, financial advisers need to ensure they clearly explain to clients the service they are offering and at what price. For these two factors will continue to make far more sense to most consumers.
Keith Richards is chief executive of the Personal Finance Society