Aimed Assistance: Do the recent FCA and Treasury proposals for the UK's financial advice sector effectively address their intended goals?
UK Introduces New Regulated Activity: Targeted Support in Financial Services
The Financial Conduct Authority (FCA) and HM Treasury are proposing a new form of advice called "targeted support" for financial firms to offer tailored suggestions to groups of consumers with similar financial needs or objectives. This initiative aims to bridge the "advice gap" and make offerings of tailored advice more widely available and affordable.
Under this new regime, firms will be able to provide ready-made suggestions or specific support on financial products and decisions to consumers with common characteristics without delivering fully personalized financial advice. The regulatory framework for targeted support is still under consultation and is expected to be finalised later in 2025.
Key elements of this framework include: - The proposed amendment to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to formally introduce the targeted support regulated activity. - The FCA's creation of bespoke conduct standards tailored to targeted support, alongside a dedicated authorisation gateway for firms providing such services. - Firms must still comply with relevant aspects of the existing Consumer Duty, such as supporting customer understanding and tailoring communications appropriately. - A clear distinction between targeted support and full advice to ensure consumers know the difference, with ongoing consultation on simplifying advice rules to delineate simplified advice from holistic advice.
When providing targeted support, firms will be required to inform customers of the common characteristics they have been aligned with and any limitations to the scope of products or services being recommended. Firms that do charge for targeted-support services will need to ensure fair value.
The provision of targeted support will be a new regulated activity under article 55A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Firms must monitor outcomes experienced by retail customers, focusing on identifying risks of unsuitable suggestions, understanding alignment issues with consumer segments, and ensuring products remain suitable for the relevant segments.
Examples of targeted support range from pension saving recommendations, tax-efficient pension withdrawals, investment product suggestions, to switching to better-value funds. The FCA requires firms to have reasonable grounds to believe consumers will benefit from the support and to predefine the applicable consumer segments and ready-made suggestions.
Firms providing targeted support will be required to establish customer segments, design ready-made recommended outcomes, and assess whether the customer aligns with the pre-defined customer segments. Targeted support is available in respect of securities, structured deposits, insurance, and pensions, but not mortgages.
Firms that provide full-scope MIFID services and are subject to MIFIDPRU will also have a minimum capital requirement of £500,000 (compared to the current entry point in MIFIDPRU of £75,000). Non-MIFIDPRU firms that provide targeted support will have a higher minimum capital requirement of £500,000 (compared with the current minimum of £20,000).
Under current rules, firms can only be remunerated for personal recommendations through adviser charges, and there are restrictions on long-term cross-subsidisation. However, the FCA envisages that targeted support can be provided as a low-cost or free-to-use value-add, with no restrictions on cross-subsidisation.
The FCA does not believe that targeted support will be appropriate for more complex financial needs or asset classes. Beyond this, firms will need to consider if it is appropriate to refer customers to tools or support in other contexts, and whether it is appropriate to explain any assumptions made by the firm in making a ready-made suggestion and whether the customer should consider shopping around.
Under the current rules, firms offering targeted support will need to conduct ongoing monitoring and reviews of their communications to ensure consumer understanding and appropriate outcomes. Currently, there is no proposal to extend the regime to appointed representatives (ARs), although HM Treasury do request feedback on this point.
The consultation is open until 29 August, and the FCA aims to publish a policy statement with final rules by the end of the year. This new regime is part of a broader FCA and government strategy to support consumer decision-making in pensions and investments and improve the affordability and availability of financial guidance.
- The new regulated activity of targeted support could open up opportunities in the personal-finance sector for fintech companies, allowing them to provide affordable investment advice to individuals with similar financial needs or objectives.
- Firms offering targeted support are required to comply with relevant aspects of the existing Consumer Duty, which includes supporting customer understanding, and tailoring communications appropriately.
- The financial industry may witness a shift in investment strategies, as businesses offering targeted support focus on providing ready-made suggestions or specific support on popular financial products, such as pension savings or investment products.
