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What we've learned from the FCA's advice reviews

The FCA has now published its work on the impact of the RDR and the FAMR

Graeme Stewart

Graeme Stewart

12 January 2021
The FCA has now published its work on the impact of the RDR and the Financial Advice Market Review (FAMR). 

Last month, the regulator published two papers as part of this work: an evaluation paper on the RDR and FAMR, and consumer research which informed the FCA's findings. 

The research was drawn from two different sources: the Financial Lives survey and qualitative research carried out by Ignition House.

The Financial Lives survey was a quantitative survey of 12,865 adults completed from December 2016 to April 2017.

Separately, Ignition House held 16,190 interviews between August 2019 and February 2020.

These interviews included 70 one-hour in depth discussions and 15 discussions with those who'd taken regulated advice in the last 12 months, including some users of automated services.

A further 55 discussions were held with those who hadn't taken advice in the last 12 months.

While the research was conducted before Covid-19, it reveals some interesting comments made by interviewees around their thoughts on financial advice, advisers and how they feel about taking advice in general.

These may be helpful when reviewing your own advice proposition and charging structure.

Key findings

The vast majority of people were confident to make decisions themselves without support when building a savings buffer in a savings account or cash Isa. 

There was an even mix between those who were confident to make their own decisions and those who wanted support when deciding on the need for life insurance and critical illness plans, taking out or switching a mortgage and whether they could afford to retire or not.

The majority of people wanted support when:

  • Taking out a stocks and shares Isa
  • Reviewing if enough money was being paid into a pension
  • Deciding what to do with a substantial inheritance
  • Setting up a personal pension
  • Reviewing whether people were doing the right thing
  • Deciding what to do with pension money at retirement
Many people also wanted ongoing support when managing their existing investments.

The Financial Lives survey also suggests many people don't understand their pension options very well.

Respondents who were planning to access their defined contribution pension in the next two years were asked to identify the key features of a single life annuity, income drawdown and uncrystallised funds pension lump sum (UFPLS).

In the case of a single-life annuity:

  • 26 per cent said they'd never heard of a single-life annuity
  • 18 per cent thought a single-life annuity held the risk that the value of their fund could go up or down
  • 9 per cent thought that under a single-life annuity they could leave their pot to someone when they died
  • 55 per cent knew this option would give them a guaranteed income for the rest of their life.
There are also misconceptions with income drawdown.

A minority thought it gave a guaranteed income for life, though 39 per cent identified the risk that the value of their fund could go up or down. Some 70 per cent hadn't heard of UFPLS.

The FCA perspective

The FCA says advice firms appear to face little competitive pressure to innovate and offer new more affordable services, or to attract less wealthy consumers.

It adds competition doesn't appear to be operating effectively in the interests of consumers.

Both the RDR and FAMR sought to improve the retail investment market in various ways, and the FCA found most measures show the advice market is moving in the right direction.

It cites the fact that over 4 million UK adults accessed advice in the previous 12 months (up from 3.1 million in 2017), and that 56 per cent of consumers are satisfied with the advice they received, up from 48 per cent in 2017.

There are, however, areas where the FCA is looking for different ways to make the market work better for all consumers.

The regulator found that even firms without a formal minimum investment threshold generally have high average pot sizes among their clients.

This indicates that access to advice is, in practice, limited for consumers with smaller pots.

The research also found that take-up of automated services was held back by a number of factors, including a wariness about using unfamiliar brands.

Next steps

The FCA wants more people to invest. For people with sufficient wealth, having it all in cash will not generally make sense for them.

To make that happen, the regulator wants to see a much broader range of support services available so people can find the right support for their needs that will give them confidence to invest.

The FCA is now considering what further work it needs to do in light of these findings, and expects to carry out this work in the first half of this year. 

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Paradigm Mortgage Services LLP is a Limited Liability Partnership.