Series 8 Episode 3: Targeted Support: the start of a new advice era

Transcript

Tessa Norman: Hi everyone, and welcome to the latest episode of Risk and Regulation Rundown, the podcast where we share our views on the latest issues shaping financial services risk and regulation. I'm your regular host, Tessa Norman, and today we're talking about the long-awaited launch of targeted support. We're going to be exploring what this new service means for firms. We'll be talking through the various opportunities and challenges that it presents, talking about that from a regulatory perspective, as well as thinking through the business and strategic implications. We're also going to be looking ahead to how technology and changing business models may well continue to reshape the advice and guidance landscape going forward.

I'm delighted to be joined by two brilliant guests, Andrew Strange, who's PwC's Financial Services Regulatory Insights Asset and Wealth Management leader, and by Ian Ody, who's a PwC Director who works with our wealth management clients on a range of risk related issues. Welcome to the podcast.

So, let's kick off. The targeted support regime is set to launch for pensions and investments on 6 April. This is a new service, and the aim is to support consumer decision making by filling in the gap between generic guidance and individual advice. Andrew, would you mind starting with a bit of a recap in terms of what is the FCA seeking to achieve through targeted support and where does this fit within the broader regulatory agenda?

Andrew Strange: Sure, thank you Tessa. As you said, targeted support sits between full advice and guidance. And I think one view is that post 2012 and the retail distribution review, there was that advice gap that was created as some advisers pulled out of the market, so it seeks to tackle that. There's probably, however, a slightly more nuanced and wider context for it. So, you've got the government very focused on the growth agenda and the FCA also therefore reflecting that in their approach as well. And targeted support ticks a number of boxes for me there. One, you might argue it superficially appears deregulatory, actually there’s an awful lot of opportunity from this and potentially there are new services that firms will be able to offer.

Two, it potentially extends retail participation in capital markets, which is part of that growth agenda as well. And three, as I think we've all acknowledged as former advisers, some of us, consumers having access to capital markets probably results in better outcomes for people in the long run as well. So, it ticks a lot of boxes. You could almost argue a bit like Solvency II was the Brexit dividend over the last few years, I feel like targeted support has become the answer to quite a lot of the regulators' challenges. I also think it's worth just briefly touching on, and maybe we'll delve into this in more detail, but it links through to a lot of the other agenda, so it almost underpins it. If you think about some of the disclosures in the consumer composite investment world, if we think about potentially simplified advice, about FOS reform, and the FCA's also got a discussion paper out there at the moment on expanding access to retail markets, retail investments, all of that actually also plays into it. So, I think it's important in its own right, but there's a wider sort of context and background for it.

Tessa: That's really helpful. And as you say, we'll be coming back to some of those other initiatives in a bit more detail later on in the conversation. Before we do that, it'd be interesting to get your perspectives on how at the moment are we seeing firms respond to the new flexibility that targeted support is going to be opening up. I understand it's something that a wide range of different types of firms are interested in. Ian, what are you seeing among your clients? How are they approaching this? Do they see it more as a strategic opportunity or a regulatory obligation? And is there a bit of a gap opening up between early movers and those who are a bit more cautious?

Ian Ody: I think that is probably true to say. There's definitely a gap. We know and we're hearing from clients that the regulators pushing firms to apply for the new permission and that that process is now open. And we're seeing people engaged in doing that application but being slower to push together what the proposition will actually be. Now part of the application process is just showing your proposition to the regulator, and the regulator said this should be an ever-evolving proposition that's going to come through, so we need to be able to change it. I think firms are a bit reluctant to put everything out there. So, we're seeing sort of proof of concepts coming out. We're seeing single product type targeted support ideas coming out. I will probably get to this later on in more detail, but technology is playing a huge part here. But fundamentally the opportunity is huge. So, you can look at it from the regulator point of view of the 23 million underserved consumers out there who need regulated advice of some description. I was reading a survey just this morning, 25% of adults are not confident in getting advice from advisers, either through cost or the trust that they've got in them. That's a huge number really. What we're trying to do is bring back the trust and the confidence back into financial services and bring consumers back to the advice table.

Tessa: As you both outlined, it's potentially quite broad the scope, and there's potentially quite a lot of pressure for it to be lots of different things. Andrew, what are the key use cases that you're seeing firms focus on?

Andrew: There's a lot, as Ian alluded to. I think you can bucket them. So, some of them are around helping people make better decisions. The example the regulator regularly uses is, if you've got people with 10,000 pounds in cash savings, potentially some exposure to equities will be good for them. So, there's some positive places like that. Certainly, in the discussion process and the consultation process there are also examples around helping people avoiding making bad decisions, that double negative.

People like you probably shouldn't be withdrawing 15% of your retirement funds when you're in decumulation because you're running out of money, which could be advice if given in a certain way. So actually, helping people avoid that's good. And then the third one, which I think is also interesting, is if I think back to, for example, Oh goodness, I'm going to age myself here, but like the late 2017s, 2018s around the asset management market study, there was lots of debate there around value and asset managers, for example, who in that scenario had clients who had the not cheapest share class and wanted to novate people into cheaper share classes that perhaps didn't pay trail commission to old advisers and things like that. Actually, I think in this world, there's an awful lot of firms out there with legacy back books who are thinking about consumer duty for example, and how to achieve good outcomes, and actually thinking, I can't give advice for somebody, or I don't want to give advice for somebody to transfer out of this comparatively expensive product into something new, but a targeted support model might give me the ability to move more people en masse into a better outcome.

Tessa: I think that outcomes piece is key, isn't it? I think the way the regulators framed it is that targeted support can be a way of firms achieving good outcomes for their consumers. They don't have to offer it to comply with consumer duty. But maybe the flip side of that is that when firms are thinking about whether to offer this or not and how it looks like, they of course need to make sure that they're meeting their regulatory obligations, including consumer duty. What are some of the key regulatory considerations that firms are working through?

Andrew: It's complex and Ian's obviously helping a lot of our clients with this as well. There are a range of rules there that firms have to think about, and it's important when you're thinking about that segmentation of customers. You need it to be not too narrow that effectively you're giving somebody advice, but not too broad as to be ineffective, because you need to be able to demonstrate that it's a reasonable outcome. You need to be thinking about probably a broader process. There will be people who enter a targeted support process, but for whom it's not suitable. And that might be actually it's just not suitable full stop. But it might be they need full advice and there's an opportunity to help them there, or it might be guidance can help them and so on. And thinking about the testing side of it. This is about consumer behaviours and understanding. It's more than just a tick box process. Testing how this works for consumers and how it lands is a really crucial part of it.

Tessa: Ian, how does this marry up with what you’re seeing from firms, are there particular challenges and considerations that they're focusing on?

Ian: Some of the challenges we are trying to address, and one of the biggest unknowns almost, is what the FOS would view in terms of the outcomes that customers are receiving from targeted advice. They have come out with a statement, and they have got a MOU with the FCA, there are a lot of acronyms in that Memorandum of Understanding with the FCA. But the bit that is tripping most people up, especially the banks because the banks know so much about their customers, is that the FOS are stating that firms must not provide the consumer with a suggestion if there is information of which the firm is aware or ought reasonably to be aware. That is quite a big statement. A bank knows everything about me, they might know I go gambling to the casino every Saturday night, they might know that I play the lottery a lot, they might know that I get pay-day loans, at what point does that depth of knowledge that a bank may have come out and become reasonable to know about someone’s financial affairs and where the targeted advice should sit, so these are the bits that people are grappling with right now. Some of its very academic. Fundamentally someone whose got cash in a bank account that’s been sitting there for five years, way in excess of an emergency need, should be thinking about better returns in order to meet their financial objectives and banks should be there to facilitate it. Equally, at retirement point people need to understand what the options are and the best option for someone in their circumstances. These are the things that should be straightforward but may not be.

Tessa: You touched on data, and I think whenever data is playing a really important role, there’s the potential for firms to use AI to augment their approach, to what extent are you seeing firms think about AI as part of their targeted support propositions and more broadly how do you see AI potentially changing the advice and guidance landscape?

Ian: I think AI is obviously huge here. Targeted support almost has to be a digital journey for customers, and the reason for that is, if you sit down with a client to have a targeted support discussion, they will almost 100% of the time sit down thinking they are getting full advice because of the nature of human interaction. So targeted support will almost have to be a digital journey and be cost effective. And therefore AI, machine learning, technology will come into its own, so the AI will help with the segmentation of customer bases. It will help speed up getting to good outcomes for customers. One of the problems though there, is that we already know in the consumer duty guidance, that firms have got an obligation to keep an eye on their AI and make sure it’s not generating a bias there, so keeping good outcomes for customers and ensuring the AI is not taking us down streets we don’t want to go. So, they are going to have to keep testing their AI outcomes if they are going to do down this route. Governance is going to play a real important part. Fundamentally, I don’t think AI is going to abolish it, when we were talking about the advice guidance debate, I don’t think it is going to abolish it, I think it is going to intensify it. The point of AI would be to personalise things on scale. Whereas, targeted support is about segmentation and taking that step up, so we need to be really careful how we apply AI into this kind of scenario, so we are not drilling down too deeply into a personalised piece of advice, which AI could definitely do, and keep it at the right level for targeted support.

Tessa: Andrew, I'd be really interested to hear your perspectives on that and particularly thinking about some of the additional regulatory initiatives that you mentioned at the start. Do you see targeted support as the start of a broader reshaping of how advice and guidance are delivered?

Andrew: Yes, I do. Specifically, to Ian's point there, he's totally right. AI could deliver something that's too personalised and therefore wouldn't meet that targeted support definition. And I'm not allowed to pontificate about 10 years’ time and where the wealth management sector will go in terms of technology. The other bit that's interesting, and we don't always think about this with our sort of FCA hat on, a lot of firms are talking about data and talking about things like GDPR and the ICO as well. So, there is an interesting angle here around data because the superficial data a firm holds about Mrs Miggins, there could be a lot of other data that AI could be harvesting and using through things like open finance as well. It's a really interesting use of technology we're seeing here.

But yes, to go back to your question, Tessa, yes, you're totally right. There's a lot more sort of stuff going on here. And I think that's really, I'm going to use the phrase, the slim end of a slippery wedge or something like that, mix my metaphors up. If you think about targeted support in isolation, I think it's really interesting. I think if you think about a broad advice process. Actually, what a lot of this does boil down to is the data you hold on people there. And if I know lots about a person, I can probably engineer a targeted support outcome, or maybe a simplified advice outcome, or maybe full advice, or maybe it's just guidance. And we've already seen references in the pure protection market study to the regulator talking about the pure protection gap and whether therefore targeted support could be a solution for that element as well. If I think about some of the changes we're beginning to see in the mortgage market, well actually advice in the mortgage market used to have to be face to face and non-advice services to avoid that confusion about advice used to be tech-driven or over the telephone, for example. If you're building an advice model based on data, why does it have to be about investment or pure protection? What else about the mortgage market? The other bit I think is interesting, again, talking to some clients around this, is people thinking about access to those clients and access to that data and access to almost ready-made cohorts. I think the interaction with workplace is interesting. You can make some assumptions about the staff of PwC in terms of they have a pension and they have certain benefits. Maybe that's an interesting route in for some of these services to people as well. My concern therefore actually is that, I'm talking to some wealth firms who are giving that full advice, who aren't necessarily that excited by targeted support, actually your future customers in 10 or 20 or 30 years may come to you for full advice, but equally before then they may well have had their help to buy ISA, transferred into an equity ISA, the mortgage supporting that, their protection arrangements dealt with, engagement through pensions in the workplace, this could fundamentally change the ongoing longer term landscape of future customers.

Tessa: I think that's really interesting. I definitely see some of those parallels, particularly some of the debates that are going on in the mortgage space at the moment, given some of the reforms that the FCA is talking about there and changing consumer behaviour and patterns. In the mortgage landscape, there's a feeling that some of those current silos between later life lending, it needs to be broken down. So, like you say, we can better serve customers holistic needs. Really interesting.

Andrew: Can I just add one other thing that I think of as well? Through the RDR process, there was a big focus on the way people were paid, and there was effectively outlawing of vertically integrated firms, that cross-subsidy. Now targeted support isn’t ripping up the rules, but it is introducing a degree of flexibility about that. To go back to that kind of broader growth agenda from the regulator and a different approach to it, if actually the way that we can fund some of these services is differing in firms, it opens up a variety of different routes and opportunities for the way firms integrate and sell products as well. There's lots of different levels to it.

Ian: And picking up on that, I can absolutely see the model where we start off with guidance, and we've seen this with some of the big investment providers, and they give you a huge amount of information that you can learn from. You've got your guidance moving into targeted support. And then as a strategy, people who fall out of the targeted support network then fall into simplified advice. And as a strategy, again, they fall out of simplified advice into full advice. That is a way of attracting new clients, new customers through your entire advice proposition, be it investment or pension or whatever. And we're seeing the banks and insurance companies pick up on this. They want to get back into the advice stable. The FCA is telling them to get back into targeted support. So how do we make this a successful strategy for them? And that very much could be one of those strategies. Insurance companies now have wealth firms attached to them, as do the banks. We've seen all of the major banks coming in with new private client, mass affluent type advice propositions. I think targeted support is a real opportunity for these people, coupled as you say, Andrew, with simplified advice. But not just that, it's the generational gap. My son who is 27 currently. He would never dream of going to a crusty old financial adviser like myself from back in my day and pushing out all of their income and their outgoings, etc on a table and having that discussion. It would completely turn him off. He's wanting something that's digital, that's fast, that's there when he can see it on his phone and he can make decisions as on the fly.

Tessa: I think connecting it to that broader opportunity to grow the market, to bring particularly younger generations of consumers in is helpful. We've covered quite a lot of ground in our conversation and as we kind of bring our discussion to a close, I'd really be interested to hear each of your thoughts on what's a key takeaway that you'd like listeners to take away from this? Ian, I'll come to you first.

Ian: I think agility is absolutely going to be on the agenda. We're going to see changes to this regime over time. I think simplified advice will also bring a new nuanced targeted support. So be prepared to flex your model. Build a model that you can change. The FCA will expect it. They want to see you adapting and evolving your model for a period of time as the rules change and indeed as false decisions come out following complaints. We'll need to see that flexibility. Stay agile but also keep the governance sharp.

Tessa: And Andrew?

Andrew: I think that I've got two messages. One, it's about data. So, this is arguably, it's product agnostic. And some of the most interesting conversations I've had have not been necessarily with traditional financial services businesses, but they're people who can come in and access data and bring things together. I think that's really interesting. The second bit I'd say is, this feels like probably the biggest shift in the broad advice landscape that we'll have seen for 15, maybe even 20 years. There are going to be winners out of this, there are going to be losers out of it. I think the additional flexibility, the potential scope for me is exciting. Firms that engage a bit and engage early, I think will do better than those firms that perhaps take their time and consider this in too much detail rather than cracking on and trying something. Not everyone's going to be successful, but the ones that try first, I think, potentially have the best chance of success.

Tessa: Brilliant. Well, thank you both so much for joining our discussion today. Lots to reflect on and take away. I think that point about this being the start of a much broader evolution and really encouraging firms to be part of that and to be agile really came through. So, thank you very much. Thank you very much to our listeners for tuning in. If you'd like to find out more about targeted support, please do get in touch and we'd be really keen to carry on this conversation with you. And if you enjoyed this episode, please do subscribe to the series and do consider leaving a rating or review as it helps other listeners to find us. Thank you again, and I look forward to speaking to you again as part of our next episode next month.