Although this is an improvement from the 3.1 million (6%) in 2017, Steven Cameron, pensions director at Aegon, said the figures show that “not enough people are getting the support they need”.

During its evaluation of the impact of the Retail Distribution Review (RDR) and Financial Advice Market Review (Famr), the regulator said the advice and guidance market is “moving in the right direction”.

But Cameron believes that, while the two measures raised the issues of professional standards and ‘product bias’ across the industry, they played a key role in “making the advice gap bigger”.

“Despite Famr’s attempts to address this, the advice gap, and alongside it a guidance gap, is still very much alive and kicking and has arguably got worse since the effectiveness review was launched in May 2019.

“Since then, professional indemnity (PI) insurance issues have got worse, Financial Services Compensation Scheme (FSCS) levies have risen further, and the supply of advice on transfers from defined benefit (DB) schemes has fallen ever further behind demand,” he added.

More advisers

But the FCA believes there is a positive note coming from its data.

The number of advisers in the market rose to 36,400 in 2019, compared with 35,000 in 2016.

Sheldon Mills, interim executive director of strategy and competition at the FCA, said: “We want consumers to have access to high-quality advice and guidance at the right time in their lives, to give them the confidence to make better investment decisions.

“Our evaluation has found the advice and guidance market is moving in the right direction, but still has further to go. We will play our role to support the market to improve further, in the interest of more consumers. We will use the evidence base this evaluation has given us, along with the responses to our Call for Input on consumer investments, to shape our work to improve the market.”

Sector frustration

But Sarah Waring, client and proposition director at Quilter, said that not enough has been done for the retail and advice space.

“It has been sometime since the regulator’s interventions through RDR and Famr and there is palpable frustration from both the sector and the regulator that more improvements haven’t been made,” she said.

“The supply and demand dynamics within the advice market are complex. Part of the advice gap is the lack of understanding around the value of advice that is on offer and who it benefits.

“Many people think financial advice isn’t for people like them or they wouldn’t benefit from it and this is a significant barrier to entry. Equally, we know advisers are in great demand and under time-pressure.”

Not a ‘silver bullet’

The FCA also discovered a surge in the use of robo-advisers, which held £3.2bn ($4.3bn, €3.5bn) in assets in 2019, up from around £400m in 2016.

Additionally, consumer awareness of ‘automated advice’ has increased to 19%, compared to the 10% of 2017.

Quilter’s Waring acknowledges the potential that technology has in filling the advice gap, but also warns that the UK “remains behind markets like the US where the use of technology and artificial intelligence (AI) is more advanced”, and where ‘hybrid’ advice is becoming more common.

She added: “That being said, technology is clearly not the silver bullet. Although there is more awareness of automated advice services, people remain wary.

“The explosion of financial scams during the covid-19 period has made people more wary than ever. The FCA research showed that respondents were concerned that unknown brands might not survive in the market, or that they would have less robust security than the larger established firms.

“Technology is a great democratic power to allow services to reach a wider audience, but we need to be cognisant that when it comes to their money people are very cautious.”

Greater access needed

This creates an opportunity to show people how valuable financial advice actually is, Waring believes.

“People are obviously trying to make good decisions but many are missing out on critical support unless we can create clear boundaries to allow for the provision of guidance, which experience of Pension Wise shows us is likely to augment advice and not threaten it.

“Approximately 750,000 people across the UK now retire each year. We know that now more than ever, people need the value that financial advice has to offer.

“A combination of pension freedoms, the covid-19 pandemic, volatile markets and the need for wealth to filter down the generations are just some of the reasons the UK public need greater access to advice and guidance on their financial affairs.”

The scheme allowed financial advisers applying for a statement of professional standing (SPS) to use continuing professional development (CPD) as a way to bridge any missing content between existing and new exams for level 4 qualifications.

The measure was introduced when the Financial Conduct Authority (FCA) rolled out the Retail Distribution Review (RDR) in 2013.

But the CII said that a recent review found that the qualifications allowed under gap-fill “are beginning to be outdated”, so it decided to end this option.

Keith Richards, chief executive of the Personal Finance Society, said: “The gap-filling option effectively managed risks to consumer harm, while enabling a fair transition to RDR qualification requirements for advisers who have, for example, been continuously absent from work.

“However, given the length of time that has elapsed since the introduction of the RDR, it is now appropriate to end this transitional approach and apply appropriate standards of recognition of prior learning to professionals who have qualifications that do not fully meet the FCA’s criteria for advising on retail investment products.

“As a result, we will be ending the ‘gap-filling’ CPD process as a route for advisers to attain a statement of professional standing from the end of August 2021.”

Shared move

But the CII is not the only industry body to come to this conclusion.

The Chartered Institute for Securities & Investments (CISI) informed its members in May that its gap-filling will come to an end by 31 December 2020.

It told International Adviser a reminder had been sent to its members last week about the measure.

“CISI has taken the decision to withdraw gap-fill for our exams as it is no longer appropriate to fill the gaps in qualifications in this way as a result of changes made to the exam standards by the FCA.

“If you wish to use gap-fill you must complete and log any gap-fill with CISI by 31 December 2020.

“The December sitting of our Private Client Investment Advice and Management qualification (PCIAM) was to be the last time you could use gap-fill with PCIAM.

“As the December exams have been postponed until February, the February sitting will now be the last time you can use gap-fill with PCIAM, but you must still complete and log your gap-fill with us by 31 December 2020.”

Industry consent

Financial advisory firms in the UK agree with the trade bodies’ decision, with the number of advisers affected expected to be very small.

Ban Wright, director of strategic development at Tenet, told IA: “We appreciate that, for those affected, it means some more formal study in what is already a difficult environment to operate in.

“The regulated landscape has changed so much in recent years and we would agree with the CII that older qualifications may no longer be as relevant as they once were, and advisers have had seven years since RDR to bring their qualifications to the required standard.

“It’s important to remember though that an exam is only proof of knowledge at a set point in time, which makes the ongoing CPD so important for advisers.”

Edward Grant, director of technical connection a St James’s Place, agrees.

He told IA: “The announcement to end gap-fill in August 2021 is totally understandable.

“It is great to see that the CII have given time for members to complete the gap-fill, which is important for returners and non-advising teams that have versions of the diploma that were relevant and appropriate at the time they completed them.

“SJP will be communicating the changes across the partner support specialists who are likely to be most impacted.”

The financial watchdog said in an update that the review will not overlap with evaluations on issues such as:

• Requirements relating to defined benefit pension transfers;
• Changes to the award limits for the Financial Ombudsman Service, including consequential impacts on the professional indemnity insurance (PII) market; and
• Changes to how the Financial Services Compensation Scheme (FSCS) is funded.

The FCA said: “It would not be an efficient use of our resources to focus in this review on areas where there are other FCA projects that are either underway, or have recently been completed in these areas.

“Our work will be informed by these other projects, but we don’t want to duplicate work in these areas. Therefore, we have decided not to include certain issues in our review.”

All the feedback it has received about areas it is not including in the RDR and FAMR review will be used in the other FCA projects.

While there are legitimate cost and duplication concerns, failing to conduct a full review risks leaving gaps in any proposed legislation.

Disappointing

Keith Richards, chief executive of the Personal Finance Society, said he was pleased the FCA was using the feedback in other areas but believes the review should not be divided.

“It is disappointing […] as this needs to be joined up rather than treated separately.

“The Financial Advice Market Review was supposed to identify ways to close the advice gap, including how to remove unnecessary regulatory barriers and cost.

“Post pension freedoms, the demand for face-to-face financial advice is greater than ever but changing the award limits for the Financial Ombudsman Service has increased the cost of regulated advice without considering the conflict with FAMR consumer objectives or a broader solution to both PII and FSCS.

“Over the next few months, the FCA has confirmed they are planning to conduct additional research on the impact of the Retail Distribution Review and Financial Advice Market Review in order to produce a final report in 2020. They will review the impact of the increased ombudsman limit separately to this work.

“I believe this work needs to be joined-up.”

Sensible

But not everyone agrees.

Tom Selby, senior analyst at AJ Bell, added: “With the FCA now reviewing two previous reviews, it is hard to escape the conclusion that regulation is beginning to eat itself.

“That said, it is crucial the advice market continues to work well for investors and the world has changed significantly since the RDR was introduced at the start of 2013. Provided these reviews – and any subsequent interventions – focus squarely on improving outcomes for savers and investors then they should be welcomed across the sector.

“Firms already dedicate significant time and resource complying with regulatory requirements and responding to data requests from the FCA.

“While we accept such costs are part and parcel of ensuring a safe market for investors, avoiding duplication of work is sensible as any unnecessary burdens risk pushing costs up for firms. When this happens, customers will ultimately end up paying through higher charges.”

Themes for review

In May 2019, the FCA issued the review into RDR and FAMR to see if they have both been successful.

RDR was meant to increase transparency in the industry and ensure clients received high quality advice, while FAMR was done to explore ways in which government, industry and regulators could take steps to deliver affordable and accessible financial advice and guidance to everyone.

The UK watchdog has received 57 responses following its request for feedback; from a range of consumer bodies, trade bodies and firms.

Some of the main themes that have emerged so far include:

• Access to appropriate services: A number of stakeholders have said that not all consumers have appropriate access to a wide range of services to help them in their financial planning, particularly those with smaller amounts of money to invest. They said that this problem has worsened in recent years and that regulatory costs have contributed to this;
• Regulatory perimeter: The boundary between providing guidance services and regulated advice is not clear to all stakeholders. We have been told that this can result in some firms feeling unable to provide potentially useful information to consumers if they feel there is a risk that it will be perceived as regulated advice;
• Consumer engagement: Stakeholders said that consumer education in financial planning issues could be improved to encourage engagement with advice and guidance services; and
• Innovation: Many stakeholders said that consumers value face-to-face advice and that alternatives (including online services) are less popular. Others said that new forms of advice and guidance are reaching more consumers, but that more work needs to be done to incorporate technology into the market to help consumers. Another suggestion on innovation included the idea of developing streamlined advice processes for simpler products.

The FCA added: “This is a summary and does not reflect all the points raised. We thank stakeholders for taking the time to respond to our Call for Input and engaging with us through our events and meetings to date.

“We are not commenting at this stage on the various issues raised, but are using the feedback we received to help focus our continuing work.”

Next steps

Over the next few months, as part of the review into RDR and FAMR, the FCA is planning to conduct additional research.

This will include information on the industry and consumers.

It will survey a sample of firms, to collect additional data about the industry, at the beginning of August.

They will have until the end of September to complete the survey.

The FCA will also review data it already holds from firm reporting, and from FCA market studies and supervisory work.

The watchdog also plans to gather consumer information through:

• The Financial Lives Survey (FLS), which is an extensive survey of consumers based on face-to-face and online interviews about their experiences of financial products and services; and
• Separate qualitative consumer research to support the quantitative data in the FLS.

It expects to publish the final report in 2020.

International Adviser hosted its annual International Investment forum in the two cities in mid-May and took the opportunity to survey delegates about their views on recent regulatory changes.

The Burg verses the Cape

RDR is being introduced in three stages, with the deadline to comply with phase one set for the end of 2019.

The second phase is expected to commence in 2020.

So, using IA’s anonymous polling app – delegates were asked: How much of a priority is RDR currently for your business?

Taking into consideration the staged nature of its introduction, advisers were able to choose from four responses:

Taken as a representative sample of each city, Cape Town advisers appear to be taking more of a wait-and-see approach when it comes to RDR.

Risky strategy?

The phased nature of the roll-out carried the risk that firms would become complacent, as two years to get ready for something seems like a very long time.

The danger now, however, is that some firms have not left enough time to ensure they are compliant.

Additionally, given the lack of clarity expressed by roughly a third of advisers in each city, there does seem to be some confusion as to what exactly it is that they need to be doing.

Political turmoil and economic issues have dominated the headlines of South Africa since long before RDR was first tabled in 2014.

While the South Africa regulator may have been wise to give firms more of a slow adoption, there was the risk it would lose any burning sense of urgency.

As evidenced by two-in-five Cape Town advisers and a third of those from Johannesburg who are giving priority to other things.

Two is better than one

One of those ‘other priorities’ was likely the introduction of Twin Peaks, which went live on 1 April 2018.

It saw the creation of a prudential regulator – inventively called the Prudential Authority – which is housed in the South African Reserve Bank (Sarb).

The other ‘peak’ is the Financial Sector Conduct Authority (FSCA); which saw its predecessor, the Financial Services Board (FSB), given a new name and a new mandate.

The FSCA has three key objectives:

• Ensure that financial institutions treat customers fairly;
• Enhance the efficiency and integrity of the financial system; and,
• Provide existing and potential financial customers with education programmes, and otherwise promote financial literacy and capability.

The question posed to the audience at both events was: How much of an impact has Twin Peaks had on your business?

Again, delegates were given four responses to choose from:

The clear response was that, a little over a year post-implementation, the success of Twin Peaks is still up for debate.

While only a handful of respondents felt that there was more of an impact on their businesses than they had expected, the strongest response from both events was that it is too early to tell.

The FSCA is likely still finding its feet and could easily decide to take a more hard-nosed approach to regulating the financial advisory sector. Additionally, it could keep its current light-touch.

Only time will truly tell.

Moving forward

The recent national election put to rest the questions of who will govern and how strong will their mandate be.

But it would be unwise to assume that any sense of political stability – no matter how fleeting – will mean that RDR and Twin Peaks will be the last regulatory hurdles thrown at the sector.

So far, South Africa has been on the right side of history when it comes to protecting clients and has moved more quickly than other jurisdictions to do so.

As other countries have discovered, however, the pace of regulatory change rarely slows and it will be of great interest to see what the government, Sarb, the FSCA or the South Africa Revenue Service (Sars) come up with next…

RDR was meant to increase transparency in the industry and ensure clients received high quality advice, while FAMR was done to explore ways in which government, industry and regulators could take steps to deliver affordable and accessible financial advice and guidance to everyone.

In addition to RDR and FAMR, the current review will also look at what consumers want from the market and how the market works to deliver this. It will also consider how market trends and developments might affect the future development of advice and guidance services.

In the call for input, the FCA said it wants to assess whether client’s are getting value for money, and is asking for feedback on the importance placed by consumers on the cost of advice and guidance compared with other factors.

“The development of new business models can improve competition and drive down the cost of advice and guidance services,” the FCA said.

“Cost is, however, only one element in determining the value of a service. Other factors include elements such as the quality of the service, the level of support provided, and the range of additional features offered.”

Refocus

Steven Cameron, pensions director at Aegon, said: “Since the RDR and FAMR were implemented, the need for advice and the value it provides have continued to grow.

“The 2019 review offers a real opportunity, not just to assess effectiveness against the original aims of the reviews, but to reflect on recent changes and look ahead at how regulation can best meet the future needs of both consumers and advisers.

“We are keen for the FCA to refocus on closing the advice and guidance gap. Recent measures to protect individuals who don’t seek advice are helpful but enabling more people to get advice would be a better solution.”

Help and guidance

Tom McPhail, head of policy at Hargreaves Lansdown, said: “There’s plenty of evidence that access to the right guidance and reassurance can transform people’s confidence, their engagement and their attitudes to investing; ultimately it can make a significant positive impact on their financial futures,”

McPhail said. “The availability and the certainty around the quality of guidance hasn’t been adequately addressed yet.

“Too often firms are still wary of crossing the boundary into inadvertently giving advice and as a result they stop short of giving the guidance their customers seek.

“The review announced today looks well placed to gather evidence on how to build on the success of existing reforms, and extend consumer access to advice and guidance while maintaining high levels of consumer protection.

“The nature of financial advice is also changing, with a trend away from the old model of a recurring relationship with regular fees, towards a more transactional approach, where people buy advice to address specific issues, as and when they need to.”

Details of feedback

The FCA is seeking initial feedback by 3 June 2019.

It will hold several stakeholders events, and collect further data through consumer research and surveying a sample of firms.

The financial watchdog intends to publish its final report in 2020.

Christopher Woolard, executive director of strategy and competition at the FCA, said: “Millions of people look for help and support in making financial decisions every year and the aim of the RDR and FAMR was to help the market develop the right advice or guidance services consumers need to make those decisions.

“Consumers and the market are changing rapidly, as technology, employment patterns and inter-generational challenges change the way consumers interact with financial services.

“As well as looking at how the market has evolved since RDR and FAMR, it’s important that our work looks ahead to see how we ensure that this important sector works well in the future.

“We want the market to deliver a range of good quality, affordable advice and guidance services that meet consumer needs.”