Targeted support: do new FCA and Treasury proposals for the UK advice market hit the target?

The Financial Conduct Authority (FCA) and HM Treasury have unveiled their proposals for helping retail clients to make more informed decisions about their pensions and investments without needing to obtain a full, individualised recommendation.

This initiative introduces a new form of assistance known as "targeted support", designed to allow regulated firms to provide tailored suggestions to groups of consumers who share common characteristics.

What is targeted support?

Targeted support is a new form of advice that allows financial firms to offer ready made suggestions to groups of consumers who are facing similar financial needs or objectives. For example, individuals who are drawing down on their pensions unsustainably, not saving adequately for retirement, or holding excess cash in their current accounts could benefit.

Many of the current sources of financial advice which people access are either more general offerings that are not tailored to the consumer's circumstances, or are fully personalised advice offerings which are expensive and/or need a minimum investment pot. The goal for targeted support is to bridge the "advice gap" by making offerings of tailored advice more widely available and affordable, albeit the advice will be tailored at a customer segment level rather than specifically for the individual.

How will it work?

Targeted support will be a three stage, symbiotic, process.

Stage 1: Establishing customer segments

The firm must establish one or more customer segments that share common characteristics or situations. The segments need to be defined with sufficient granularity to ensure that the firm can assess whether its ready made suggestion (see below) is suitable for any customer in the segment. To that end, the firm will establish both "including characteristics" and "excluding characteristics" (being characteristics that may render the suggestion unsuitable).

Stage 2: Designing ready-made suggestions

The firm must design ready-made recommended outcomes that are suitable for all customers in the relevant designated customer segments. Effectively this means assessing suitability of a recommendation based on the common characteristics of the relevant customer segment. 

Stage 3: Aligning customers to a customer segment

The firm must assess, using reasonable skill and care, whether the customer aligns with one of their pre-defined customer segments (that is, meets the designated characteristics and situations) prior to providing a ready-made suggestion to them.

A new regulated activity

The provision of targeted support will be a new regulated activity under the article 55A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. This means that even firms with existing advisory permissions will need to submit a variation of permission to offer this service.

Currently, there is no proposal to extend the regime to appointed representatives (ARs) although HM Treasury do request feedback on this point. The ARs regime is prevalent in the financial advice market (notably through adviser networks) and even some direct-to-consumer, or D2C, platforms, so this may create an unequal playing field and hinder adoption.

When providing targeted support, customers are deemed to be retail clients. This may be a consideration for firms that only have professional client permissions (it also means that the Consumer Duty will necessarily apply to all targeted support).

When can targeted support be provided?

Under the draft legislation, targeted support is available in respect of securities, structured deposits, insurance and pensions. It does not cover mortgages.

Moreover, the FCA does not believe that targeted support will be appropriate for more complex financial needs or asset classes. For that reason, the FCA will not allow it to be used to recommend:

• investments that are already subject to restrictions on retail distribution (that is, non-mass market investments, restricted mass market investments or investments caught by the Conduct of Business sourcebook (COBS) 22);
• pension consolidation; or
• specific annuity products. Recommendation of annuities (in general) with certain features will be permitted, subject to detailed rules to prevent firms from indirectly recommending a specific annuity product.

Clear communications

The FCA is keen to ensure that clients are aware from the outset that they are only receiving targeted support, its nature and limitations. In providing ready-made suggestions, 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.

When exiting customers from a targeted-support user journey, or providing targeted support for annuities, firms must refer customers to other channels of support.  Beyond this, firms will need to consider if it is appropriate to refer customers to tools or support in other contexts, and also 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.

Ongoing review

Firms will need to conduct ongoing monitoring and reviews of their targeted-support communications to ensure consumer understanding and appropriate outcomes. This includes testing communications and taking reasonable steps to ensure consumers comprehend the information provided.

Firms must also monitor outcomes experienced by retail customers, particularly focusing on the results generated by targeted support. This involves identifying risks of unsuitable suggestions, understanding alignment issues with consumer segments and ensuring products remain suitable for the relevant segments.

As part of this, firms will have a duty to review changes to product information to ensure that they remain suitable for its ready-made suggestions and that the changes do not cause harm to customers that have invested in the product. When harm is identified, there is a duty to mitigate the harm. While targeted support is not an ongoing service per se, the proposed rules will create an ongoing duty of sorts.

Charging for targeted support

Under current rules, firms can only be remunerated for personal recommendations through adviser charges, and there are restrictions on long-term cross-subsidisation.

The FCA envisages that targeted support can be provided as a low cost or free to use value-add.  Although firms will still be prohibited from receiving third-party commissions, there will be no restrictions on cross-subsidisation. This could be an advantage for vertically integrated firms.

Firms that do charge for targeted-support services will need to ensure fair value.

Prudential requirements

For the purpose of prudential requirements, firms offering targeted support will still be categorised as either Prudential Sourcebook for MiFID (Markets in Financial Instruments Directive) Investment Firms (MIFIDPRU) firms or non-MIFIDPRU (typically personal investment firms), depending on the scope of their services.

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).

Firms that providing full-scope MIFID services and subject to MIFIPDRU will also have a minimum capital requirement of £500,000 (compared to the current entry point in MIFIDPRU of £75,000).

These higher-baseline capital requirements reflect the FCA's view that targeted support is a high-risk activity with a broad reach, and the consultation is open to introducing further capital requirements on a scalar basis. On the other hand, high capital costs could impede new market entrants from being able to offer this service.

Other reforms

Targeted support was one of three FCA initiatives to encourage firms to offer more guidance and support to customers on their investments; the others being the creation of a refreshed simplified advice regime and to provide further guidance on what does, or does not, constitute regulated advice.

Simplified advice already exists in the FCA Handbook, and means a personal recommendation focused on a specific need which only takes account of information relevant to that need (as opposed to holistic advice that takes account of the customer's wider circumstances). The FCA has now dropped plans to create a new, bespoke simplified advice regime, but will instead revisit its rules in COBS 9/9A to see if they can be simplified and the distinction between holistic and simplified advice made clearer.

With regards to the advice perimeter, the FCA received lukewarm feedback for adding to its existing guidance on the topic. The FCA will instead move to consolidate and simplify its existing materials on the advice boundary.

Consultation and next steps

The FCA has adopted an innovative approach to developing these proposals, including a six-week policy sprint involving firms, consumer representatives and regulatory bodies working together to design consumer journeys as a basis for the new rules. This collaboration has accelerated the consultation process, which is now open for public feedback.

The consultation is open until 29 August. The FCA aims to publish a policy statement with final rules by the end of the year. Consumers, financial firms, and other stakeholders are encouraged to share their comments and insights.

Osborne Clarke comment

Targeted support will be a significant change to advice market, and the expectation is that platforms and product providers will be early adopters. Existing advisors may also be interested in offering targeted support as an alternative service or even as value add to engage prospective clients. 

Targeted support will only be a success if it allows firms to deliver advice at a lower cost and reach a broader market – therefore getting the right balance of compliance is essential for these proposals.

Firms considering targeted support should start to think about how their proposition will look. Firms will need new FCA permissions to offer this service and the window for applications will open in good time ahead of the new rules. 

From a practical perspective, firms should be thinking about:

• The interaction between targeted support and regulated advice and how this will be positioned within the scope of their services and, in particular, the design of their customer segments and ready-made suggestions.
• The information they will collect on customers, and how information they already hold might be used and integrated into this service.
• How they will measure good outcomes and what an appropriate governance, monitoring and management information framework will look like.
• Any changes to data collection needed to satisfy regulatory reporting requirements.
• Updating policies and procedures, terms and conditions and staff training programmes.