FCA prepare for “Financial Advice Shakeup”

The UK’s financial advice landscape is widely seen as needing significant reform due to a combination of factors creating an “advice gap,” leaving many consumers vulnerable or underserved. Here’s a breakdown of the key reasons driving the call for a shakeup:

1. **The Massive “Advice Gap”:**
* **The Core Problem:** Millions of people who *need* financial advice simply cannot access it. This is primarily due to cost.
* **Regulatory Burden & Cost:** Stricter regulations post-2008 financial crisis (like the Retail Distribution Review – RDR) raised professional standards and banned commission bias, which was good. However, it also significantly increased the cost of providing *comprehensive, regulated financial advice*. Advisors now charge substantial fees (often £150-£250+ per hour or fixed fees per plan), pricing out middle and lower-income earners.
* **Who’s Left Out:** People with modest savings, those needing help with budgeting/debt, workers with auto-enrolment pensions needing guidance, families needing basic inheritance planning, and those approaching retirement with smaller pots often find full advice unaffordable.

2. **Complexity and Consumer Confusion:**
* **Blurred Lines:** The distinction between “regulated financial *advice*” (personal recommendations, regulated, costly) and “financial *guidance*” (general information, not regulated, often free/low cost) is poorly understood by consumers. Many don’t know what level of help they need or are getting.
* **Product Complexity:** Pensions (DB vs DC, drawdown), ISAs (multiple types), investments, tax rules – the UK financial landscape is incredibly complex. Consumers struggle to navigate it alone but can’t afford professional advice.
* **Risk of Harm:** This confusion and lack of access lead people to either:
* **Do nothing:** Leading to poor outcomes (inadequate retirement savings, insufficient protection).
* **Rely on unregulated sources:** Social media “finfluencers,” unqualified friends/family, or make decisions based on marketing, increasing the risk of poor choices and scams.
* **Mis-buy “simpler” products:** They might buy products like certain ISAs or insurance without understanding if they’re truly suitable or the best option, potentially due to the issues highlighted with products like the Lifetime ISA.

3. **Affordability and Sustainability of the Advice Model:**
* **Focus on Wealthy Clients:** The high cost of providing regulated advice means advisors naturally focus on clients with significant assets (£50k+, often £100k+). This business model isn’t sustainable for serving the mass market.
* **Shrinking Advisor Numbers:** The regulatory burden and shift to fee-based models have contributed to a reduction in the number of financial advisors, further limiting access.

4. **Pension Freedoms and Retirement Risks:**
* **Increased Responsibility:** The 2015 pension freedoms gave people much more flexibility but also much more responsibility and complexity in managing their retirement savings (e.g., drawdown).
* **Risk of Poor Decisions:** Making the wrong choices at retirement (taking too much too soon, poor investment choices, falling victim to scams) can have devastating, irreversible consequences. Access to *affordable* guidance and advice at this critical point is crucial but often lacking.

5. **Technological Change and Consumer Expectations:**
* **Demand for Digital Solutions:** Consumers expect intuitive, digital-first services for everything, including finance. The traditional advice model often struggles to deliver this affordably at scale.
* **”Simplified Advice” & Hybrid Models:** Technology enables new models like streamlined (“simplified”) advice for specific needs, automated guidance tools, and hybrid human/digital services. However, regulation hasn’t always kept pace, hindering innovation in making advice more accessible and affordable.

6. **Regulatory Pressures and the “Advice Guidance Boundary”:**
* **Fear of Overstep:** Firms offering guidance are often terrified their helpful suggestions might accidentally cross the line into regulated advice, exposing them to huge liability and regulatory sanction. This “chilling effect” stifles innovation and prevents firms from offering more useful, personalised support.
* **Calls for Clarity/Reform:** There’s a strong push (from regulators like the FCA, government, and industry) to clarify or potentially *redefine* the boundary between advice and guidance to allow firms to provide more meaningful, personalised support without triggering the full regulatory burden of advice.

**What a “Shakeup” Aims to Achieve:**

The core goals of any reform are to:

* **Bridge the Advice Gap:** Make some form of helpful financial support accessible and affordable to the millions currently excluded.
* **Clarify the Advice/Guidance Boundary:** Enable firms to offer more personalised, useful guidance without excessive regulatory fear.
* **Embrace Innovation:** Leverage technology (robo-advice, AI tools, hybrid models) to deliver support at lower cost and scale.
* **Improve Consumer Outcomes:** Reduce the number of people making poor financial decisions due to lack of support, leading to better retirement planning, debt management, and protection against scams.
* **Create a Sustainable Market:** Foster advice models that can viably serve a broader range of clients, not just the wealthy.

**In essence:** The UK system currently fails too many people. It’s too expensive, too confusing, and too restrictive for the complexity of modern financial decisions. A shakeup is needed to create a more accessible, affordable, and innovative ecosystem that provides consumers with the *right level* of support they need to make better financial choices.

Thanks to “DeepSeek” for the research on above.