Platform and Sipp operator AJ Bell is warning that the distinction between financial advice and other information or guidance services has become blurred and this is having two dangerous consequences.

The Manchester-based company says that the blurring is causing people to “think they have received advice specific to their needs when they haven’t” and means that some people do not understand the value of financial advice or guidance and hence don’t use either of them.

The company says that addressing this lack of distinction between advice and guidance is crucial in order to improve consumer engagement with both options and should be one of the principle outcomes of the current Financial Advice Market Review (FAMR) which is reviewing the effectiveness of the Retail Distribution Review.

AJ Bell says that the FAMR must identify a “clearer definition” of what consumers can expect from financial advice relative to guidance services. Two simple definitions for advice and guidance need to be mandated by the FCA for use across the industry and all existing definitions should be removed, it says. This will enable people to understand whether advice or guidance is most appropriate for their specific needs and increase use of both.

AJ Bell believes advice should be defined as a personal recommendation where the adviser takes responsibility for ensuring that recommendation is suitable to the person’s needs. Guidance should be defined as information that can help people make their own decisions that they are responsible for.

Whatever the definitions agreed by the FAMR, they must be simple so that people can understand them and pass the ‘what’s in it for me’ test. This should be tested with consumers before implementation.

Billy Mackay, marketing director at AJ Bell, said: “The current system is anything but simple. The various regulatory concepts or labels that govern financial advice are unnecessary and just create complexity. The FCA paper names five – basic advice, focused advice, independent advice, personal recommendation and regulated advice.

“These labels are nonsense and whilst they may not be used directly with consumers they create unnecessary complexity for the companies providing advice. Complexity nearly always equals cost and for some that is one of the major barriers to taking financial advice.

“The regulatory labels also mean that the various services have to be explained to consumers in a myriad of different ways. This is another barrier. It can be very difficult for the man on the street to understand the options and work out which is best for them. When things are complicated and difficult people often chose to do nothing.

“Simple definitions that make it clear to people what they will get out of advice and guidance would help them understand the value in each and hence improve their engagement with both of them.”