Speech by Sarah Pritchard, executive director, markets and executive director, international at the FT Financial Advice Forum, London.
Speaker: Sarah Pritchard, executive director, markets and executive director, international
Event: FT Financial Advice Forum, London
Delivered: 24 September 2024
Note: This is the speech as drafted and may differ from the delivered version.
Highlights
- We have a unique opportunity to do things differently and re-draw our regulations for the better of consumers and firms.
- This will require open conversations on risk, and the FCA is listening to stakeholder feedback.
- Firms should act now, embracing data and digital to innovate and meet the needs of their consumers.
Besides boasting a comprehensive spa, delightful buffet breakfast and impressive 4.5 rating on TripAdvisor, you may have noticed on your way in that The Leonardo Royal Hotel London City is also home to a rare surviving fragment of the London Wall.
Built by the Romans around the second century, the Wall was essential for protecting the city.
For centuries, it stood as a sturdy boundary, safeguarding its inhabitants from external threats.
But as time went on, the city evolved. The threats to the people within changed as did their requirements ... so did the Wall.
Over the years, it was adapted. Windows and new gates were added, to reflect the changing needs and habits of the people it served.
Just like the London Wall, the structures and boundaries we put in place over our financial systems must be maintained and respected, but also adapted as our needs and circumstances change.
As the risks we face evolve, so must the protections we have in place, to ensure they remain relevant and strong.
That is why the FCA is moving to a less prescriptive and more outcomes-focused approach … an approach that responds to the environment we are living in, allows for growth and progress, but keeps consumer needs at its heart.
In doing so, we must respond to an ever-evolving landscape and – crucially – maintain our ability to think ahead, anticipate challenges and seize opportunities.
That means being bold, proactive and embracing change for the better.
It will require some open and frank conversations on risk and how we balance that … but all in order that we might reap the rewards.
Regulatory framework
And now is the right time to be ambitious in our thinking.
With our new regulatory framework, we have a once-in-a-generation opportunity to undertake a review of our rules, making sure they match our market and our risk appetite.
This won’t be change for change's sake. It will be a clear-sighted assessment of what works and what doesn’t.
And the way we approach it will be different, too.
No regulator knows best, but greater collaboration – with government, with consumer groups and with industry – is vital as we shape the regulatory regime of the future.
The advice market is one area we know where reform is needed.
Our 2022 Financial Lives Survey[1] showed only 8% of adults reported taking financial advice in the previous year.
And earlier this month, Barclays reported that 13 million people were holding £430 billion cash savings that could be put to better use in investment, potentially boosting their returns and UK growth.
A lack of confidence may be holding people back – 43% think investing is too risky, and a quarter that it is too complicated.
Our Consumer Investments Strategy[2], published in 2021, set out an ambition of people being able to invest with confidence, understanding the risks they are taking, and the regulatory protections provided. In the strategy, we clearly state that we wanted to see a reduction in the number of consumers with higher risk tolerance holding over £10,000 in cash.
We want to see a thriving consumer investment market where consumers can make more informed decisions, based on their risk appetite.
There are 2 significant pieces of regulatory reform work that will help us deliver that. And alongside that is our InvestSmart campaign[3] which aims to help inexperienced investors make better informed investment decisions based on their appetite for risk.
The campaign raises awareness of the risks of undertaking high-risk investments and drives consumers to the InvestSmart website which has videos and articles on positive investing principles, like adopting a long-term view.
The latest version of our regular tracking survey, which took place in May, showed 65% of the target audience were able to select 3 positive investment principles from a list when prompted, up from 56% at the start of the campaign.
And 81% of the target audience now say that they would prefer to learn about investing from established sources, up from 63% at the start of the campaign.
Let me turn now to the ongoing regulatory reform which we hope will drive a more thriving consumer investment market.
Advice Guidance Boundary Review
The confidence to invest lags because people so often don’t have access to the support they need.
One of the reasons for that is firms’ fear of overstepping the line between guidance and personal recommendation.
We want to see a continuum of help being offered to support consumers, without the cliff edge of the current regulatory framework.
Much like the original Roman wall outside, which has been adapted to suit different circumstances over the centuries, we are re-thinking the boundaries.
Last year, we launched the Advice Guidance Boundary Review (AGBR), jointly with the Treasury, to make sure that consumers get the help they want, when they need it, at a cost that is affordable. Clearly, legislation may be needed to create any new regime as well as regulation. That is why we are working jointly with the Treasury from the start, so that we can then move quickly through legislation and regulation once we have tested what will work in the market and for consumers.
We published a policy paper[4] with the Treasury in December last year to set out our early thinking. That paper was positioned around potential solutions – as we knew from feedback on previous consultations that any new regulatory framework needs to be commercially viable to deliver improvements for consumers. The paper highlighted the depth of interest from industry and consumers on this work, and we are grateful to everyone who offered views.
Two weeks ago, we published a piece of consumer research[5] which will complement the consumer research we will be doing to inform our regulatory reform. This research used behavioural insights to test how and when to engage UK pension customers in their decision making. It sought to overcome common barriers, like the tendency to focus on the present rather than the future and feeling overwhelmed by too much information.
These insights will help us develop our thinking on challenging questions at the heart of the advice guidance review:
- how we build in the appropriate consumer protections
- to what extent we need prescriptive versus outcomes-based regulation
- balancing firms’ desire for certainty with the need for space to innovate
We will continue to work closely with both industry and consumer groups as we develop our proposals and will look to rely on the Consumer Duty[6] as part of the new regime where it’s simplest and clearest to do so.
But that does not mean firms should sit on their hands whilst we pursue broader reform.
Reform takes time but there is no need to wait; we want firms to consider how they can better support their customers now.
That is why in August 2023 we published practical examples of the types of activity that firms can provide without crossing into ‘advice’ or personal recommendation under the current rulebook.
This should help firms get closer to the current advice guidance boundary and deliver for their clients with confidence.
We stand ready to help those with new, genuinely innovative ideas, to bring them to market.
For example, through our digital sandboxes, where new ideas can be safely tested. Many firms are already making use of these, and I would urge you to get involved if you haven’t already. You do not need to wait for the AGBR to conclude before testing new solutions in our sandboxes – innovation that takes place now can help inform the long-term solutions.
Preparing for the future through innovation and embracing the opportunities that data and technology bring, will be key to offering more accessible, affordable and innovative services to consumers. If we get this right, firms will be in a better position to harness technology to reach the underserved, with more accessible financial support products available to a greater number of people.
Before I move on, I wanted to stress that the aims of the AGBR review will only be met if there is a vibrant and sustainable “capital A” advice market too. We want consumers to be able to access current full advice offerings as well as testing the need for a new simplified advice regime, and better forms of help through targeted support.
The ambition that consumers have access to the help and guidance that they need, at a cost they can afford, when they need it – so that they can make informed decisions – will only be achieved by the market providing a wide variety of offerings.
So, to the advisers in the room – don’t retire yet, thinking you will be replaced by robots – we want to see a vibrant and sustainable financial adviser market too, alongside any new regulatory offerings.
Disclosure
Confidence to invest is also created by having easy-to-understand, clear, reliable information on which to make decisions.
As part of the government’s repeal and replacement programme, the Treasury has committed to transfer rule-making powers for the much-loved PRIIPs (packaged retail investment products) and parts of MIFID (UK legislation and rules regulating markets in financial instruments) to the FCA.
We acknowledge that current disclosure rules have not necessarily resulted in useful information being available at the right time or in the right place in the consumer journey.
We now have a unique opportunity to design flexible and proportionate regulation which is tailored to the UK market. Regulation that supports retail investors to buy products that suit their needs.
We plan to consult on the new regulatory regime this autumn, and to finalise rules in the first half of 2025. We will lean on the Consumer Duty, where it is most effective and efficient to do so.
I hope we have already signalled the pragmatic way we will approach this work.
In recent months, we and the Government heard clearly from industry that PRIIPs were not working for UK-listed close-ended investment funds. That for some, the rules meant unrepresentative cost disclosure, putting them at a disadvantage.
While we did not previously have the legislative lever to make change, we acted last October to provide investment funds with greater comfort in providing greater context on costs.
And last week, following confirmation from government that it will bring forward legislation, we went further by signalling regulatory forbearance until the law is changed.
Collaboration
We want to take a similar approach as we look to reform:
- open to feedback
- responsive to need
- working in close collaboration, whether that is industry, government or consumer representatives
That’s why we have increased our engagement.
Last year, we attended 29 industry events.
This year, over 30 so far, with another 10 in the works.
We are grateful for all the views shared with us through our consultations on replacement rules so far.
This is a conversation, and we want to hear your views on what’s working, what isn’t and how we can make regulation work for us all.
Risk/reward
That conversation is crucial.
Because the shifts we are making are fundamentally about an adjustment to risk appetite.
The concern regularly expressed is that we have become focused on the chance of loss at the expense of possible return.
As we approach change, we must be open and honest – as we were with our capital markets reforms – that:
- change brings with it a different balance of risk, and sometimes greater risk…
- the more people who are supported to invest through accessible help and clearer disclosure, the more people will be affected by the inevitable ups and downs of the market
But while we should be clear on those risks, as we design a regulatory regime for the future, we must not lose sight of the fact a low-to-no risk appetite has an opportunity cost. Both for individuals and for the wider economic growth that benefits us all.
Consumer duty and our supervisory expectations
As we seek to make necessary change, we should also emphasise our unwavering dedication to the underlying principles we as regulators should uphold.
So, any rule changes will complement the standards set out under our Consumer Duty.
You will be aware by now that the Duty cuts across all retail financial services and sets a higher standard of care that firms must give to consumers.
But importantly it does so by consciously taking an outcomes-based approach … handing firms scope for flexibility and innovation in determining how best to deliver for their consumers.
That includes allowing smaller firms and sole traders – who we know often feel regulatory pressures the most keenly – to take an approach that fits their size, market and clients.
So fewer tick boxes, better outcomes for consumers, increased consumer trust.
It’s great to see how many of you have embraced the Duty and harnessed it to shift culture and improve outcomes already, for example by eradicating jargon and moving clients to less bespoke and cheaper options where that is a better fit.
This is solid progress but there is always room for improvement.
As we set out in our CEO letter[7] last November, in the wealth and stockbroking sectors, we want firms to be able to assure themselves – and us – that their products meet genuine customer need … that they’re well understood and not overly complex, that they represent fair value.
We will provide challenge where we are concerned. But we will also provide support in getting it right.
That’s why we’ve been focusing on how firms are embedding the Duty’s requirements for consumer support and understanding, so we can identify good practice to help firms.
Now that we have entered the second year of the Duty, we are looking at how we can embrace it right across our Handbook. The Duty’s outcomes-based approach offers an opportunity to look again at existing more prescriptive rules.
Where they cover similar issues to the Duty, and where similar customer outcomes could be achieved with greater flexibility, we can streamline them to help firms and support innovation.
So, we have launched a call for input[8] closing soon on 31 October.
We want to hear your views. While the Duty sets rules for firms’ retail conduct, we are also asking for views, across our Handbook, about where we could rely on high-level rules instead of more detailed and prescriptive requirements. Many of you in the room will live day-to-day navigating our rules and guidance and are perfectly placed to help us identify how they could work more effectively.
Of course, where issues you raise fit best within the context of ongoing work on the AGBR and Consumer Composite Investments (CCIs) reform we will link these together.
We have upcoming events in Basingstoke and Birmingham on 10 and 11 October where we will launch our updated strategy for the supervision of financial advisers.
Here, we’re also available to hear your thoughts and feedback firsthand.
We want to help facilitate a thriving and sustainable future for your profession. We want you to understand our supervisory expectations and priorities. And we want you to take the opportunity of our call for input to tell us where we should revisit aspects of our existing rule set.
Conclusion
The FCA’s mindset is changing. Our focus on supporting consumers continues, but we are evolving the way we do this by taking a more outcomes-based approach to regulation. This gives firms the flexibility to innovate in service of their clients.
This will require collaboration. We have a solid foundation, and with the right mindset and tools, it is in our hands to build something remarkable together that will stand the test of time.
Now is the time to act, to take some considered risk, and to shape the future.
Opportunities don’t wait for those who hesitate; they reward those bold enough to seize them.