Financial advice versus financial guidance: what's the difference?
Financial guidance is set to become more of a feature in 2017, as the government and regulator clarifies the distinction between it and financial advice.
In September 2016, a Treasury consultation on amending the definition of financial advice indicated that good progress is being made in setting out how advice and guidance should each operate.
Currently, the broad definition of what constitutes financial advice is discouraging organisations from providing services that only offer guidance, limiting the public's access to help in making informed financial decisions.
It's been well-documented that there is a significant problem in the UK with the lack of financial planning and saving amongst the general population, especially amongst low and middle-income households.
Guidance must be more accessible
In part this is due to the poor understanding of the need to save and limited support in planning and taking action, although for those prepared to pay for financial advice there is a wide range of firms offering support.
Government therefore needs to grasp this opportunity to make financial guidance more accessible to the mass market and treat it as a key priority.
That's why the consultation on the definition of advice is so significant. Having greater clarity will make it easier to establish how guidance should be governed, and this will assist the millions of consumers who need help with their finances.
The focus shouldn't be solely on redefining the technical and legal definition of advice, however; we need to see it as part of a wider debate on how to address the financial challenges facing people, and to support them with easy-to-understand options covering both financial guidance and advice.
The Treasury and the Financial Conduct Authority need to be encouraged to consider how guidance can be delivered so as to balance several factors.
They need to minimise barriers for firms seeking to enter the market with guidance propositions, clarify for consumers what they can expect, and at the same time offer a degree of protection from the risk of inappropriate services.
As well as defining guidance, it's therefore important for the wider consultation programme on implementing the Financial Advice Market Review recommendations to also consider how guidance will be delivered in practice.
To help this work, in our consultation response we prepared an example framework of how advice and guidance might be, as experienced by the consumer. We also identified who is best placed to deliver each option.
It should be possible for both authorised and unauthorised parties to offer guidance with the application of appropriate disclosures, helping consumers to understand who is providing the service and how this might be linked to other services. Standards would help to ensure consistency and quality of consumer experience.
Better quality guidance
The ultimate objective here is for people to benefit from quality guidance propositions and so increase their level of savings and build greater financial resilience.
We do however need to recognise that guidance services will need to be paid for if we are to attract the investment required to support quality services that encourage mass market access.
Careful consideration will need to be given to ensure that the provision of guidance does not distort the authorised versus unauthorised market distinction.
Clarity on the definition of financial advice would also give investors easier access to different levels of information and guidance, but fall short of a personal recommendation.
Financial advisers would also get greater certainty on what constitutes the regulated activity of investment advice, with everything that goes with that, and what is outside the regime.
The current lack of transparency in the definition has meant that firms are unwilling to provide detailed guidance that allows investors to take informed investment decision for themselves.
Regardless of whether a guidance provider is authorised or unauthorised, it's important to maintain a level playing field.
This may lead to a 'kitemark' to establish some standards for the delivery of guidance services, and for transparency around the degree of protection a consumer will have when receiving unregulated guidance and regulated investment advice.
Any kitemark concept and its application needs to be kept simple, so that there is an appropriate balance between providing some standards but not creating barriers that might discourage firms from offering guidance services.
A path towards the practical delivery of a guidance framework is emerging; let's hope that the next steps in the consultation process will lead quickly to a solution that the market can adopt, so that everyone can begin to benefit from wider access to quality guidance services.
Charles McCready is a director at TISA.
- This story was originally published for our sister magazine, Money Observer.