Comments on the UK Core Investment Advice regime

There is currently a mismatch between the demand and supply of investment advice in the UK. This leaves a large number of consumers underserved; in turn, these consumers are more likely to end up holding excess cash reserves and suffering the consequences of the current inflationary environment.

On the supply side, there is little business incentive to provide advice to mass‑market consumers. This is because compliance costs for service providers are higher than what they could realistically charge to consumers with simple needs and limited money to invest. Similarly, on the demand side, prices currently charged by advisers are higher than what mass‑market consumers are willing or able to pay.

The objective of the Core Investment Advice regime is to bring 840,000 new-to-market UK consumers (with relatively higher risk tolerance, holding over £10,000 cash savings) onto the UK investment advisory market by 2025. To achieve this, the proposed regime intends to address supply and demand side issues as well.

On the supply side, the proposal aims to reduce costs associated with the provision of advice, by:

• proportionately easing qualification requirements (reflecting the lower risk of simplified advice);

• simplifying suitability assessment of consumers;

• allowing greater flexibility in fee structures.

On the demand side, investments to be included in the scope of the proposed regime would be limited to a set of mainstream investments, reflecting the simpler needs of most consumers. Among other proposed reforms, consumers would also be allowed to pay for the advice in installments.

During an in-depth analysis of our customer data, we noticed that there is a huge gap between the total number of beginner consumers visiting a broker’s website, versus the number of beginner consumers actually completing the registration and account opening processes and depositing money to start investing. The vast majority of beginner consumers are simply getting lost in the process.

Results from our research revealed that the reasons behind this trend are mainly procedural in nature. Consumers found the registration and account opening processes are complicated and not very user friendly. They were often baffled by questions related to trading knowledge or other personal information, and it was often unclear to them what documents and forms needed to be filled in or uploaded, and why.

Therefore, it is worth considering how to help brokers lower the gap between the number of consumers making only initial steps in their investment journey and consumers who actually start using the services of a broker to make investments.

We believe that brokers would benefit from regulatory support, either in the form of clarification or improved guidance, that would help them to streamline and simplify their processes. This could eliminate existing concerns about breaching applicable laws and regulations included in the FCA Handbook by not submitting every consumer (including beginners) to complex processes and lengthy knowledge, experience and appropriateness assessments.

Given the non-advised nature of the services provided by brokers in this space, we see room for simplification at the appropriateness assessment stage (especially with respect to the knowledge and experience assessment part). We argued that investment scenarios in which beginner consumers are looking after brokers for the purposes of investing in simple and straightforward financial instruments could be covered by the exemption included in section 10A.4 of the FCA’s Conduct of Business Sourcebook.

The exemption could be granted on the basis that:

• services provided here fall into the execution or reception and transmission of orders category;

• financial instruments beginner consumers are interested in, also fall into the category of particular financial instrument (as defined by COBS 10A.4) since such customers tend to invest relatively low sums of money into mainstream, non-complex financial instruments in line with their straightforward investment needs;

• services are provided on the basis of a general communication addressed to the public, about the services and financial instruments available at certain brokers;

• the lack of an appropriateness assessment could be clearly communicated on the broker’s platform;

• compliance with conflict-of-interest obligations could still be supervised and enforced (if needed) by the FCA.

With regulatory support from the FCA, brokers could separate and channel beginner consumers into simplified and more user-friendly onboarding processes. This would result in more consumers starting to invest their excess cash savings into mainstream financial instruments, ultimately supporting the FCA in achieving its objective of helping UK consumers invest.

Despite regulatory support, it may still prove hard to alter the way investment advisory services are provided in the UK. This is particularly true for the deeply embedded market and fee structures prevailing in the investment advisory industry. Furthermore, regulatory intervention inevitably imposes compliance costs on incumbents, who then need to dedicate resources to accommodate the new regime.

Therefore, we think it is worth considering alternatives that could help achieve the same objectives, with less amount of regulatory resources and lower costs to market players as well as consumers. We believe the alternative approach presented here could also be used as a solution complementary to the proposed core investment advice regime. This is because even if the proposed regime takes off, there will be beginner UK consumers who either still can’t afford to pay for advice or choose not to take it, or both. Simplified low-cost investment advice will likely provide only a partial solution for a relatively small subset of beginner consumers; with the majority still relying on information and guidance they receive from other sources to make good decisions when it comes to saving and investing.