For several years, regulators and policymakers have worried about the ‘advice gap’ in retail financial services, particularly since the Retail Distribution Review introduced a regime where advice is paid for as a separate service, rather than via sales commissions. The fear is that less well-off consumers will be unwilling to pay the cost of full investment advice and will therefore lose access to a vital resource.

In September 2013, FCA Chief Executive Martin Wheatley told MPs that alternative technology-based answers to this problem were emerging: “What we are seeing is the arrival of web-based … models that are delivering advice in a different form,” said Wheatley. “We are at the relatively early stage of seeing that.”

A year later, a few online services are operating, but the hoped-for flowering of so-called ‘simplified advice’ has largely failed to materialise."If suitability still applies, you’re still going to have to do quite a lot of data gathering, training and compliance"In July this year, the FCA tried to address the industry’s doubts over simplified advice by publishing guidance on how it is to be defined and distinguished from other varieties, such as limited or focused advice and full advice. It is clear from the paper that the FCA is keen to see simplified advice services take off to address the needs of consumers with smaller sums to invest and relatively simple needs.

However, the paper also makes clear that firms generally have been reluctant to develop these services for a variety of reasons. In a thematic review that accompanies its guidance, the FCA found four major concerns among firms that had looked at providing simplified advice: 

1. Uncertainty over the rules for determining the suitability of recommendations via online services.

2. The risk of an online advice service producing unintended and unsuitable recommendations for certain groups of users, leading to “systemic misselling”.

3. Fears that customers might choose to execute an online recommendation via another operator, leaving the firm that provided the advice potentially liable for any adverse outcome.

4. Concern over the line that the Financial Ombudsman Service (FOS) will take with complaints arising from simplified advice services and, as a result, the risk that firms could be targeted by claims management companies.


Personal recommendationAt the heart of the FCA’s paper is the question of whether or not the options suggested by an online service amount to a “personal recommendation”.


Definitions of the three main types of advice
Simplified adviceProvision of personal recommendations where the firm sets out the limited nature of the service in line with the guidance provided on this issue, either face-to-face, on the telephone or electronically.

Limited or focused advice A deliberate limiting of the range of personal recommendations sought by the client to suit their particular needs (for example, to seek a recommendation on buying an ISA).

Full advice Full regulated advice which may be independent or restricted and will consider the full range of the client’s needs, including their debt and protection needs. It also applies to discretionary investment management.

The FCA’s view is that simplified advice is regulated in the same way as full advice and results in personal recommendations to customers. Therefore these services need to be able to determine the suitability of the products they recommend for the individual involved, although the extent of the effort to do so is qualified by “the nature and extent of the services provided”, along with the condition that information needs be gathered only “where relevant”. 

Tim May, MCSI, Chief Executive of the Wealth Management Association, says that the FCA’s predecessor, the Financial Services Authority (FSA), was always unwilling to elaborate on what might be considered relevant. “The FSA didn’t wish to interpret that,” he says. “It was pretty clear you had to do full suitability for everything.” May welcomes the FCA’s effort to help “put some boundaries” around the suitability test, but points to several intertwined problems. 

First, he says, the FCA paper leaves unresolved questions over what constitutes relevant information for a more limited suitability test. This feeds the second problem: answering those questions inevitably requires firms to exercise judgment, but they lack the confidence to do so, he argues, largely due to a continuing climate of fear dating back to the reign of the FSA, although he adds: “The FCA has definitely done its utmost to try to undo that.”


Classifying online servicesThe Authority has tried to clarify its thinking on how online services will be classified, setting out a variety of possible models and indicating whether or not it regards them as delivering personal recommendations. This should help firms to work out whether they are delivering simplified advice.

However, even though the paper should help provide some clarity around online models, it seems likely that many firms will continue to regard the remaining uncertainties as too great to make the effort of providing simplified advice financially viable, particularly given the lack of guidance from the Financial Ombudsman Service (FOS) on how complaints will be handled.

The FCA paper quotes the FOS as saying: “In any complaints we might receive, we would judge the advice in the specific context in which it was given. So we would not expect a ‘full fact-finding’ exercise. But we would look at the questions asked and the options open to the particular customer concerned.”


Customer beliefThen there is the question of whether customers might believe they have been provided with a personal recommendation from an online service, even though technically they have not.

The paper provides little clarity on this score: “Firms should be mindful that if a recommendation is put forward in such a way that a reasonable observer would view it as being based on a consideration of a customer’s circumstances or presented as suitable, then this is likely to amount to a personal recommendation. However, while the customer’s own perception of the service received is very important, it is feasible that the customer will not always be correct in their understanding.”

In the end, as Andrew Power, Strategy Partner at Deloitte, says: “If suitability still applies, you’re still going to have to do quite a lot of data gathering, training and compliance. Therefore how much cost will be taken out of the system? Probably not much. And at the same time, we already know consumers are reluctant to pay for advice, so they’re certainly not going to pay much if it’s simplified advice.”


No independencePower also points to a further, major deterrent: “If you are offering simplified advice you can’t call yourself independent, even if it’s a different arm [of the firm],” he explains.

So even if the uncertainties can be resolved, it seems unlikely that providing a regulated simplified advice service is going to make financial sense for most firms. This chimes with the experience of Keith Churchouse, Chief Executive of Chapters Financial in Surrey, who also runs the online service www.advicemadesimple.com (which is to be relaunched as www.saidso.co.uk later this year).

“We set it up in 2006 and so far it hasn’t been as successful as we would like,” he says. “If I was starting cold now, I think I wouldn’t get involved, but because we are so committed to it we will carry on with the hard work.”