There is "a clear need for intervention" in the UK's financial advice industry, with consumers suffering from an "advice gap", the long-awaited Financial Advice Market Review (FAMR) has said.
The review recommends that government allow consumers to access a small part of their pension pot, which they could redeem against the cost of pre-retirement advice.
"This will ensure that consumers can access financial advice at a key milestone in their lives and feel confident in making financial decisions as they approach retirement," the report said. This would give "millions" of people better access to affordable financial advice "that meets their needs at every stage of their lives".
It also urges the government to explore ways to improve the existing income tax and National Insurance exemption for employer-arranged pension advice.
Co-chaired by Charles Roxburgh, director general of financial services at HM Treasury and Tracey McDermott, acting chief executive of the FCA, the review also calls on the government to consult on whether to narrow the definition of regulated advice "so that it is based on a personal recommendation".
"Crucially, this would create a single definition for regulated financial advice and remove some of the barriers that exist for firms wishing to offer guidance services," FAMR said.
The review also puts forward a range of recommendations for the FCA to consider in its review of how the Financial Service Compensation Scheme (FSCS) is funded, which will begin in April. It also proposes a series of measures to improve the transparency of the processes and decisions of the Financial Ombudsman Service (FOS).
But it has ruled out pushing for a 15-year-long stop over complaints regarding advice "as this would inappropriately limit protection for consumers on long-term products".
Technology should also play a greater role in lowering the cost of advice, with the review suggesting the FCA extend the work of Project Innovate and establish a specialist unit to help firms develop their automated advice models.
McDermott said: “This review has taken place against the backdrop of social and demographic changes which have led to an increasing need for individuals to take more responsibility for their own financial future. But we know that people often find it difficult to engage with financial matters and we need to make it easier for them to do so.
“The package of reforms we have laid out today will help increase both the accessibility and affordability of the advice and guidance to ensure that consumers get the help they really need when they really need it.”
Roxburgh added: “At a time when more and more people are seeking financial advice and guidance, we have set out how we can deliver a vibrant financial advice market that works in the interest of all consumers. Our recommendations will increase the amount of affordable, high quality financial advice that is widely available so it’s easier for people to access it at every stage of their lives.”
Tom McPhail, head of retirement policy at Hargreaves Lansdown, welcomed the proposals saying the industry had become "an increasingly dysfunctional system with providers withdrawing from the market and consumers not getting access to the services they required".
He added: "The most critical proposal is to simplify and clarify the boundary between advice and guidance; it should allow firms more latitude to deliver useful guidance without having to charge an advisory fee or worry about inadvertently straying into giving personalised advice.
"Overall this is good news for investors; over time they should find the investment industry more accessible. The development of clearer, simpler engagement, through the Dashboard, the Pension Passport, rules of thumb and with shorter suitability reports, will all help to reinvigorate consumers’ experience of dealing with the industry.
"We’re less convinced about extending the development process for advisers and the notion of ‘streamlined’ advice. Where regulated advice is given it should adhere to high standards; there is a risk that these proposals could undermine this extremely important principle and allow poor practices to creep back into the industry."