Building Financial Capability in the UK: the role of advice

If we were working in such an environment, then a question such as “…will authorized advisers be able to work forward from information gathered, and recommendations given, through a generic advice process?” becomes less problematical as one could assume that an informed member of the public could take some responsibility for the information they were providing to an authorized adviser.

Clearly, we are some way off from such a state of play at present but we believe that this should be the goal.

It will be apparent from our comments that NIACE believes that any changes made should have as their objective the empowering of the individual to make informed choices rather than the creation of another layer of one-way advice. Having said that, the providers of advice and information clearly have to take responsibility for its accuracy particularly if the individual recipient may act on that information.

This is a challenging area made more difficult by the complex web of interrelationships between areas of financial activity that might not at first sight have any connection. A straightforward example of this would be the connection between an individual’s need for life assurance and the provision of life assurance through a menu-based benefits structure at his or her place of employment.

An education process could involve, for example, learning about the financial challenges posed by the loss of a parent or earner, the various resources that can come into play to meet those challenges and an understanding of the risks involved.

Generic advice might adapt this information to the situation of the individual, assessing what needs actually exist in these circumstances, helping the individual quantify those needs and looking at the resources available to that person. This could include looking at the general features of personally owned life assurance alongside the features of life assurance provided through the employer’s benefits structure.

The point at which the individual makes a choice between such options for his or her personal use may indeed be the dividing line between generic and regulated advice - assuming that the individual chooses to seek advice before making that choice.

The principle of professional liability presumes a disparity of knowledge between the two parties involved where the consumer of advice recognises the gaps in their own knowledge and is content to pay a fee for the professional adviser to use his knowledge to fill those gaps in order to make a decision. It also presumes the possibility of some financial loss if a poor course of action is recommended.

The picture we have painted of an individual approaching the generic advice process already with a measure of understanding derived from their own learning experiences could lead to a more flexible regulatory process.

The only recognition of different levels of liability at present is represented by such concepts as the “expert investor” or execution-only transactions. In both cases, no real recognition is made of the basis of knowledge or capability for the consumer to occupy either status. In an execution-only transaction, the consumer writes to an adviser stating the precise details of the regulated product desired and the adviser confirms in writing that no advice has been sought or given and that no liability will be accepted for the suitability of the transaction.

With the development of suitable educational processes, we see no reason why individuals should not pass through a generic advice process with sufficient knowledge and confidence to make genuinely informed decisions about their financial requirements. This could have the effect of loosening our current very linear and prescriptive regulatory regime and increasing price competition in the regulated advice market.

To return to the example of protecting against the loss to a family of an earner caused by death that we used earlier in answer to this question, we can envisage the following process occurring for our learner:

However, NIACE firmly believes that our long-term aim must be a public that has sufficient knowledge and confidence to make all these decisions themselves, should they choose to. Generic advice would be seen less as an essential step in the process of arriving at a financially well-organised public and more as just one option that individuals might choose in the course of understanding and reviewing their own finances.

We have argued earlier, generic advice should be seen as a process of assisting the individual to marshal the information and learning experiences to examine their own situation. There is no inherent reason why each person should not undertake this themselves with the use of “DIY” tools. However, the extent and complexity of the UK financial landscape does require a degree of knowledge that even defeats some authorised advisers!

NIACE believes that this is an area that requires further research, as there is currently only anecdotal evidence about the relationship between the effectiveness of face-to-face advice and that of “DIY” tools.

We believe that the secret to this lies in a process of public education in the widest sense. The public should be encouraged to become educated before they attempt to use generic advice tools or services. In practice, the lines between the steps identified in our table in section E above will always be blurred. One way of helping people to make this progress will be to ensure that any DIY tools are always designed to be used in conjunction with teachers if required.

Provided that a clear distinction remains around regulated advice, we do not see why there should not be a porous interface between education and generic advice. For example, teachers involved in financial learning might make use of fictional or real “case studies” to illustrate the practical application of the knowledge being imparted. Generic advisers might well consider that a large part of their work was educational. Indeed, many regulated advisers consider that education and generic advice are important precursors to regulated advice within their own work.

The examples of generic advice currently available that are presented in the working paper highlight an important aspect of the working definition of generic advice, namely, that it should address the experience and needs of the individual in the broadest sense and not just deal with selected issues.

Seen in this light, there certainly are gaps! While there are very important services provided by departments of Government, Citizens Advice and others, these are mostly devoted to one topic.

Looking at the gaps, the reasons mainly come down to the question of who pays for it and why. Some of the gaps are undoubtedly related to the income and social profiles of those sections of the public where no provision exists. One of the less welcome consequences of the Financial Services Act 1988 was that the extent of the processes of complying with the regulations made some previously commercially viable services no longer viable.

One thinks of course of the demise of the industrial branch life office services (door to door services), which had provided (albeit expensive) access to well-structured savings and protection products for large sections of the least affluent members of society. Many of these life company officers were considered family friends who provided valuable educational services as well, passing on values of family responsibility and prudence to new generations of savers as the children of their customers came of age.

Whilst not wishing to over-sentimentalise this, it does highlight the waning of traditional working class savings patterns that are at the heart some of the problems we face today. Perhaps the financial “world” (providers and advisers) needs to rediscover a new financial rationale that recognises that costs saved at one point of the business process may well rear up elsewhere, for example, in customer complaints.

NIACE feels that this question should not be a priority for consideration by the working party at this early stage.

Financial exclusion is a complex and varied topic with a wide range of causes that includes poverty, basic skills, cultural and ethnic influences and also prejudice based on none of these. If our objective is to ensure that all citizens have access to appropriate financial services then different types of interventions are required for each context. Two examples will illustrate this point.

The lack of basic skills of literacy and numeracy are well known to exclude people from modern financial services and a wide range of interventions have been created by Government, the voluntary sector and, to a lesser extent, the financial sector. The main objective of these interventions has been an educational one to enable individuals to arrive at a position where they can understand financial products and services so that they can make informed judgements.

Another blatant but contrasting example of financial exclusion from recent years was the reaction of the life assurance companies to the early emergence in this country of AIDS/HIV. Practising homosexuals were almost overnight excluded from the life assurance market as life assurers struggled to understand the implications of this development for their businesses. However, this exclusion affected homosexuals from all sections of society, including some financially very sophisticated people with homes, mortgages and financial advisers!

In this case, the intervention that led to an amelioration of the situation was entirely market-driven where a small number of advisers with specific expert knowledge of the situation created niche provision of life assurance and other financial products to the gay community.

Our point in illustrating these two very different examples is to show that financial exclusion can arise from widely differing causes. In the first example, a generic advice process may well be very helpful to people who have come through a basic skills intervention and now need to review their own position. In the second example, for many of those involved, it would have been irrelevant as their own understanding of their position was already very well developed.

NIACE believes that generic advice should be seen as an important step in the process of financial education leading to informed personal action but, in view of the different causes of financial exclusion, it may serve to dissipate resources if it is focused on financial exclusion rather than an important step in the educational process.

Again, this question seems to be implying that delivery of generic financial advice would be through one or a small number of channels. NIACE believes that the richness and diversity of existing adult learning should be valued and that funding questions are best dealt with in the contexts of each opportunity. For example, much generic advice will no doubt be delivered through the voluntary sector. At the same time, initiatives are being developed to deliver advice through the workplace, funded partly by employers.

We applaud the selection of generic advice as a core topic of this first stage of the development of the National Strategy as it highlights the importance of the whole process of learning about financial issues.

We believe that a vibrant “marketplace” in generic advice can only be built on far greater efforts to improve the opportunities for adults to learn about the financial world.