Chet Velani: The FCA will regulate but can’t innovate

“Good things come to those who wait” goes the proverb – but not if you’re waiting for the Financial Conduct Authority (FCA). However, allow me to explain why good things will come to those who innovate, irrespective of the FCA’s lack of foresight.

The advice gap, or more generally the lack of effective support provided to mass market consumers, has long been a feature of the UK’s personal financial-services market. The FCA’s latest push to try to solve this enduring problem is its Advice Guidance Boundary Review.

To that end, a recent speech by the FCA’s Nick Hulme, at an event apparently addressing “Future Strategy for Personal Finance Professionals”, included a bullish call to action: “Don’t wait for [the review] to land before taking further steps to unleash opportunity and reduce that advice gap.”

Good things will come to those who innovate, irrespective of the FCA’s lack of foresight

Stirring stuff. But the word “technology” did not feature – not once. The words “artificial intelligence” were used only to describe a vague backdrop.

To my mind, the fact that there was no mention of AI’s potential in the review itself either, given it will arguably make the most significant contribution to assisting mass market consumers with managing their financial needs, is a real missed opportunity.

What’s the opportunity?

It’s a given that most people in the UK need a helping hand with their finances beyond the lucky cohort who obtain and can afford fully-fledged financial advice. If you don’t have a lot of money to spare, making financial decisions that will impact your standard of living can feel daunting or even futile, especially given that financial education is generally at a paltry level.

Unfortunately, the current uncertainty in the advice guidance boundary is a considerable constraint on financial-services companies and employers offering meaningful support. The FCA is seeking to address this issue though, setting out proposals late last year that wrestle with three solution areas:

1. Providing more clarity to financial firms to empower them to support consumers without actually drifting into regulated financial advice;
2. Devising a new approach that will allow firms to tailor their support to groups of people with similar needs and circumstances (e.g. “People like you do this.”) – aka ‘targeted support’;
3. Creating a new form of simplified advice regime that eases the way for organisations to provide affordable personal recommendations to consumers.

It’s worth noting that, although ongoing work on the advice guidance boundary review is included in the FCA’s 2024 business plan, these proposals are still at the discussion-paper stage. A timetable has not yet been announced to move from discussion to policy and implementation.

A major obstacle to any improvement is that there simply aren’t enough qualified advisers and planners to go around

A major obstacle to any improvement is that there simply aren’t enough qualified advisers and planners to go around. There’s also the issue of operating a profitable advice business when servicing clients with lower investible assets.

Simply put, that’s the opportunity: AI can help solve both these challenges and better support the FCA’s aims of improving consumers’ financial resilience and long-term wealth.

That opportunity is here and now

We know that many people would benefit from more detailed guidance on financial decisions as a precursor to full financial advice. The FCA’s proposed targeted support sounds like a great idea that could present consumers with practical solutions to consider. Knowing that other people in a similar situation have adopted a particular solution may also provide the confidence to follow it through.

But, and this is potentially a big but, how much information can be ignored when providing a steer to a consumer? Financial providers hold data on us that might conflict with targeted support focused on a specific issue.

For example, can a bank provide targeted support to a 50-something customer about increasing their pension contributions – because that’s what ‘people like you’ are doing – when they hold information elsewhere showing that the individual has large credit-card debts or an overdraft? How much detail must be sought to ensure the consumer fits into the designated group?

In other words, how granular does the ‘people like you’ fit need to be before a course of action can be suggested? The answer may depend on whether the guidance is provided publicly before registration or login. A lot of detail needs to be worked through before targeted support will be an option for supporting consumers.

Financial providers hold data on us that might conflict with targeted support focused on a specific issue

AI, however, can make guidance more effective right now. Already Large Language Models (LLMs) and avatars can be used to answer consumers’ questions, make calculations and present and explain results produced by a modeller in a more effective and engaging way than receiving static information. When targeted support becomes available, AI will be able to mine available data to deliver more focused ‘people like you’ options to the consumer.

Again, simply put: there is no need to wait for the FCA to complete its deliberations and create policy, which could easily take another two years.

The definition of insanity

Albert Einstein said, “Insanity is doing the same thing over and over again and expecting different results.” As the FCA has had at least two previous attempts at introducing Simplified Advice (excluding Streamlined Advice), there must be a healthy dose of scepticism that this latest incarnation will solve the advice gap.

Indeed, at the time of writing, there are rumours that the FCA is withdrawing its Simplified Advice proposal due to a lack of enthusiasm from the industry.

In theory, Simplified Advice could be an opportunity for major financial institutions – primarily banks and building societies – to leverage their large customer bases and play a significant role in narrowing the advice gap. The challenge is delivering suitable advice and avoiding potential consumer detriment when working with far less information on the consumer’s finances than with traditional advice.

Furthermore, consumers will not be willing or able to pay very much unless there is a strong value proposition. It is easy for consumers to underestimate the value of advice for straightforward investment, for instance. Given the relatively small amounts to be invested, the likely low fees that can be charged and the potential regulatory risk involved, it’s little wonder the industry is questioning the economics of delivering simplified advice.

Consumers will not be willing or able to pay very much unless there is a strong value proposition

The FCA appears to have ruled out advice at retirement on decumulation within Simplified Advice. Arguably, this is the area of advice that provides the most value to consumers: how to provide an income for life is probably the most important financial decision you ever need to make. It demonstrates that the FCA’s emphasis on simplification is misdirected.

A better objective would be to look for ways to reduce the cost of delivering more complicated advice that consumers really need and value. For that to happen, the industry needs to innovate.

Technology can transform advice

Relative to other industries, financial services is a long way behind in terms of how technology is used to deliver services. While it is certainly true that most consumers want or need a personal touch to help them plan their financial futures, financial advice today is still a very manual and inefficient process.

The advice profession’s lack of investment in technology is not a problem for the affluent or those needing high-value specialist advice. They are well served by IFAs, many of whom have developed deep relationships of trust with their clients. For the mass market though, it means that the cost of delivering advice is just too high.

There is also evidence that the problem is increasing as regulation increases, with more IFAs focusing their businesses on affluent clients – the new Consumer Duty requirements being the latest example.

However, all is not lost for the mass-market consumer. Irrespective of whether the FCA manages to make Simplified Advice work effectively, technology can reduce the cost of delivering advice dramatically.

For example, based on our own experience as a provider of adviser tools and digital advice, for at-retirement income advice, costs can be reduced by 66% with consumer satisfaction remaining high. With improved integration, this 66% reduction could rise to over 80%.

How has this been achieved? The biggest efficiency gains come from automating the production of advice and a suitability report. Carefully constructed advice algorithms handle the majority of mass-market cases focused on delivering a clear financial objective – communicating clearly what the advice covers and also, what is excluded, is essential.

For non-standard cases, the automated process can still be used but amendments will be needed before issuing the suitability report. Efficiency can be further improved by seamlessly integrating the automated advice process into the traditional holistic advice toolset.

The capability to significantly cut the cost of providing mass-market advice exists already

Automation can reduce costs and remove low-value tasks from advisers so they can be deployed to provide support where it is most needed. Each firm will have its own approach – for instance, more resource could be channelled into explaining reports and recommendations to give consumers the confidence to follow the advice. Human support can be supplemented with AI-driven avatars and chatbots to answer questions and perform calculations to explore options and refine plans.

The capability to significantly cut the cost of providing mass-market advice exists already. Evidence shows that high consumer satisfaction can be achieved with automated advice. AI can further personalise and streamline advice journeys, building and improving on the outcomes achieved today.

The measures in the FCA’s Advice Guidance Boundary Review can of course add to the effectiveness of automated advice. But why wait for them to regulate when we can innovate? We can start closing the advice gap today.

Chet Velani is managing director at EV