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European Commission's FSUG publishes a report and its own position on Financial Guidance for European Consumers
In 2016, the iff was part of a research team lead by the Observatoire de l'Epargne Européenne (OEE) together with PFRC, Nibud and others which conducted a study into Financial Guidance for the European Commission’s Financial Services User Group (FSUG). The Commission has now published the report alongside the FSUG’s own position paper including its recommendations based on the findings of the report. The Report provides a picture of how independent consumer needs based ‘general financial advice’ without product recommendations (Financial Guidance) exists and is organised in 6 EU Member states.

Based on desk research, a literature review, an on-line survey and interviews in seven countries (Belgium, Denmark, France, Germany, the Netherlands, the United Kingdom, and Australia), the report gives EU policy makers, national authorities and stakeholders of retail financial services examples of better practice regarding both the provision and the incentivisation of the use of financial guidance services.

The FSUG decided to commission this study because making financial decisions has become ever more complicated for consumers because of the nature of their lives, their need, abilities and nature of financial services and inadequate market and existing solutions. Consumers are expected to do too much with ever greater burden of responsibility (e.g. comparing the advantages and disadvantages of multiple offers, dealing with innovation, asking the right questions, detecting unfair commercial practices, reading terms and conditions, switching as often as possible etc.), risk of wrong financial decisions having long-term costly consequences, products having become more numerous and increasingly complex, financial services not being attractive per se, individual financial strategies being difficult to develop, and there is no access to trusted advisors operating with a fiduciary duty but mainly so-called financial advisers who are primarily salespeople.

Focused on the average consumer (not wealthy nor those with debt difficulties), the working definition of comprehensive financial guidance provided by the FSUG involves services offering an assessment of the overall financial and asset situation of a consumer and should lead to the provision of generic but tailored advice, including a financial plan for the consumer to achieve his or her goals, without a product or provider recomendations.

The report identified and confirmed the following:
  • There is undoubtedly a need for financial guidance (both from evidence collected directly and indirectly)
  • Both the term 'financial guidance' and its definition in relation to investment advice needs clarification as choosing the right term is important to avoid confusion among consumers and to maximise take-up of services
  • The extent and diversity of financial guidance provision varies across countries, In some, regulators and/or national governments have developed websites that deliver financial information, in others such as Germany, regulators do not see financial guidance as part of the scope of their responsibility. In the UK and Germany, consumer organisations play an important role in financial guidance and the Verbraucherzentralen (with a wide network of local advice centres under the umbrella organisation vzbv) are seen as a better practice model for such a service for other EU member states to follow
  • There is little information in the public domain about either business models or the detail of funding of financial guidance providers but findings suggests that the costs are much higher than consumers seem willing to pay. This explains why non-industry providers have chosen to provide financial guidance free of charge to consumers or with moderate fees such as the German consumer centres. In the UK detailed cost benefit analyses identified a strong business case for charge-free services with benefits outweighing likely costs.
  • Translating the need for financial guidance into use of services is likely to require considerable publicity. If fees for the guidance are charged it is important that they are transparent and kept low to ensure that a wide range of consumers are served. Innovative ways of incentivising use should be explored further and tested with consumers e.g. the idea to have the fee for guidance sessions tax deductible but this could be difficult to implement in practice due to the unlevelled playing field this would create vis-à-vis the professional advice sector. Demand for financial guidance needs to be stimulated e.g. via public awareness activities and specific incentives to encourage use.
  • Evidence on the effectiveness and quality of financial guidance services beyond simple measures of an overall level of consumer satisfaction is limited. There are good examples of more nuanced and robust evaluations covering both the effectiveness and quality of services, but these were relatively uncommon. There is therefore a need for more such evaluations to build a robust evidence base on what works - and more particularly what does not work.
  • Non-industry guidance providers are generally unregulated, instead often subject to other forms of quality control. Systems of accreditation for financial guidance and liability for poor guidance and redress for consumers needs further work.
In conclusion, it will be difficult to develop a blue print for financial guidance services that would be appropriate to all member states. National provision will need to build on existing organisations to cover all sections of the population and will need a diversity of channels to achieve this. It is, however, clear that comprehensive provision needs a national body (usually either the regulator or the government) to encourage the development of services, to share good practices, to promote their use and to provide oversight. Ideally this would extend to encouraging a recognised regime of skills training and accreditation as well as mechanisms for quality control and for redress in cases of poor service. Finally, this study has demonstrated the value of sharing best practices across countries and we hope that this report will begin that process.

Summary of the FSUG recommendations on financial guidance

On the basis of the findings of the OEE/iff et al report the European Commission’s Financial Services User Group has elaborated the following recommendations for EU policy makers in its position paper:

On the kind of services that should be covered by financial guidance:

  • Adopt a unique and comprehensive approach to the concept of financial advice in European legislation;
  • Clarify with ESMA whether a pure asset allocation recommendation (without specific product(s)) falls within its definition of investment advice.
  • Regulate the terms 'financial advice', 'financial advisers' and 'financial guidance' and create a legal framework for financial guidance to reassure consumers about the quality of service (including qualifications, accreditations, training, professional liability).

For financing financial guidance:

  • Put an end to the myth of free advice by requiring 'advisers' paid through commissions to communicate in writing the exact amount of commission to the consumer before 'recommendation' of any financial product, and not only for investment products covered by Mifid 2, PRIIPs and IDD (there is no obligation to disclose the amount of commissions in the latter legislation).
  • Consider a consumer awareness campaign on the remuneration schemes used for distributing retail financial services in the EU and their costs for consumers;
  • As a second step: commission ban (as in the Netherlands and the UK);
  • Allocate fines paid for non-compliance with consumer protection legislation to the financing of financial guidance;
  • Require the financial industry to pay a levy to finance financial guidance;
  • Transfer the major part of national financial education budgets to finance financial guidance.

On who should provide financial guidance:

  • Convince national public authorities they have a key role to play as a catalyst (national body to encourage the development of services, promote their use, share best practice within and across countries, encourage a regime of skills training and accreditation and provide oversight. Optionally, national authorities could provide financial guidance).
  • Promote the financial guidance provider function in the private sector and launch a deeper analysis into business case opportunities.
  • Create a network of consumer organisations and other organisations representing retail financial end-users capable of providing financial guidance (see VZBV) or at least some financial guidance services.

To encourage consumers to use financial guidance:

  • Launch an information campaign on the benefits of financial guidance;
  • Develop self-assessment tools, decision trees for the simplest needs, or as a first response.
  • Support the development of digital means to provide financial guidance (e.g. as a first step or for straightforward questions) at lower cost to consumers.
  • Adopt incentive mechanisms e.g. through a tax deduction;
  • Provide a universal right to financial guidance at a small price e.g. every 5 years.

Further FSUG views on the report findings (Extracts from the FSUG position paper):

The report has identified a need for a clear definition of financial guidance and suggests there is confusion due to financial advice being subject to piecemeal regulations resulting in an incomplete EU legal framework. There is also work to be done in unifying terminology to describe what financial guidance is because the phrase 'financial advice’ has been totally overused and consumers cannot tell if they have a salespeople in front of them or someone exclusively focused on their interest and needs.

On the basis of the report, the FSUG suggests that “financial guidance has to be understood as a process of determining an individual's financial goals, purposes in life and life's priorities, and after considering his resources, risk profile and current lifestyle, to detail a balanced and realistic plan to meet those goals. Financial guidance provides a detailed strategy tailored to a consumer's specific situation, for meeting a consumer's specific goals covering various aspects of personal finance which includes cash flow management, education planning, retirement planning, investment planning risk management and insurance planning, tax planning, estate planning and succession planning but excludes the recommendation to purchase a particular financial product.”

Financial guidance allows consumers to receive tailored financial decision-making input, personal finance plans and measures for further action of different nature e.g. ways to save more, minimise expenditures, better prioritise spending, renegotiate the mortgage, repay consumer loans, take out life insurance to protect the family, start investing in retirement products, change car insurance, switch bank, take advantage of tax benefits etc..

The FSUG considers that the main criterion for differentiating financial guidance and financial advice is that financial guidance is completely disconnected, either directly or indirectly, at any time, from any sale of financial products, while financial advice is a similar process to financial guidance prior to the recommendation of one or more financial products. It means that financial advice and financial guidance cannot a priori be provided by the same providers.

The report highlights that financial guidance as defined by the FSUG is not yet widespread. While many financial services firms claim to provide financial guidance, only two bodies have been identified as fully meeting the definition: the German consumer associations (operating under the vzbv umbrella) and a service set up by the British public authorities (Money Advice Service). While many Member States have made available to all consumers some tools on their websites that provide a first port of call for consumers, they are insufficient in most cases to help them make a comprehensive and tailored decision.

Why is financial guidance desirable? Benefits include giving access to needs based advice especially those who cannot afford wealth management services; Facilitating wider dissemination of simple financial products and better suited products to consumer needs; Cleaning up the intermediation market.

What kind of services should be covered by financial guidance? Regular financial health check-up (e.g. France) to help raise awareness on the need to act, to detect major omissions or errors, make adjustments etc.; Developing a financial plan to achieve a particular goal; Response to a specific and immediate need; Providing simple advice about products or categories of products before taking decision; Providing adequate information and tools to help them access reliable financial advice (i.e. a bridge to cover the gap between financial guidance and financial advice - which could cover list of comparative websites, ‘robo’ advisers, and where to find model portfolios that match their profile and are built by trusted and independent organisations); Providing a complaint service to support consumers resolve disputes with their financial services providers.

Financing financial guidance: Because consumers are not often willing to pay to receive financial advice and most consumers do not know that every time they buy a financial product, they remunerate the person who is recommending the product and sometimes they are doing it for the whole time of the product holding period. Consequently, they also ignore the amount, sometimes high, they pay for having been 'advised'. They should understand how commissions compare to or can be even higher than an upfront fee. As long as it is so profitable for a financial advisor to get commission for the products he recommends, the FSUG is of the view that it will be difficult to develop independent financial advice, but also financial guidance activities. Furthermore, the FSUG is of the opinion that the remuneration disclosure requirements laid down in European legislation will not be sufficient to improve the quality of advice provided to consumers.

Who should provide financial guidance? There is currently a lack of a business case for financial guidance in the private sector which suggests that public authorities are key to directly or indirectly encourage the development of financial guidance services, promote their use, share best practice within and across countries, and encourage a regime of skills training and accreditation and provide oversight. It is still early to assess the effects produced by some national laws banning commissions (UK, NL) in particular as regards the quality and pricing of financial advice to consumers.

ID: 49112
Author(s): SCR
Publication date: 09/01/17

Study on access to comprehensive financial guidance for consumers (OEE, iff and others, November 2016)

FSUG paper and recommendations on financial guidance (January 2017)

FSUG webpage to its studies

Created: 09/01/17. Last changed: 10/01/17.
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