As an end to proceedings nears, murmurs of discontent in the audience ascend to baying protests. “Lock the crooks up!” “You should be ashamed!” “You’re running away!” “Absolutely useless!”
A handful of irate demonstrators attempt to approach the stage. The security team forms a line to stop them getting close to the four men and three women hastily making their exit.
This scene isn’t from a courtroom drama – although it’s starting to resemble one. It’s how the FCA’s annual public meeting finished last week.
The executive committee acknowledged a fact that soon became evident to the crowds in the hall: this was the tensest and most highly charged outing the watchdog had faced since assuming its current guise six years ago.
The meeting gave the industry, public and press a chance to scrutinise the regulator’s latest plans for the year – and decade – ahead. The FCA’s responses provided a host of hints about what the landscape for everyone, including advisers, could look like.
A welcome challenge
Right at the start of the meeting, FCA chairman Charles Randell noted the important role the open get-together plays each year, enabling the public to question the regulator.
It would be hard to challenge the claim that the watchdog has become more open and transparent in recent years. It now produces sector views for each area of its remit – documents on how it approaches supervision, enforcement and authorisation more generally – alongside board minutes and details of external meetings and expenses.
It also tours the country with its Live and Local roadshow series. Indeed, there is so much information to be found on the publications and news sections of its website that it has become overwhelming, even for seasoned FCA watchers.
Equally, the regulator can hardly fail to engage with the industry given that the revolving door of ex-regulatory staff into the private sector shows few signs of slamming shut any time soon. Two recent examples are ex-chief executive Tracey McDermott and advice head Linda Woodall joining Standard Chartered and Aegon respectively.
In terms of proving stakeholder engagement, to start the conference the FCA rolled out a highlights package of talking heads, who told the hall what it was like to work with the watchdog. This even included a soundbite from Strategic Solutions financial planner and Personal Finance Society Hampshire and Dorset chairman Kevin Forbes.
In his statement, Forbes called on everyone to do more to alert consumers to the dangers of suspect investment opportunities, such as those promising guaranteed returns of 8 per cent on cash-like assets.
Forbes said: “It all comes down to financial education…. For the vast majority an unregulated investment isn’t appropriate, and I don’t think that’s made clear enough.”
Adviser view: Tina Weeks, founder, Serenity Financial Planning
We have to put aside quite a lot of resources that could go into client experience just to report the data they need. We care about whether clients are getting good value for money; that the business remains profitable. There is no real reason for some of the data, but we do it because we have to.
If the FCA is trying to find the rogues, it’s not going to find them through data – they will manipulate it because it’s on a self-assessment basis. Like HM Revenue & Customs, the FCA assumes it’s correct and then picks out random people to check, but it seems to pick people who are doing a good job.
How to find rogues is by talking to the clients. It’s easy to find the firms doing a good job. Speak to those firms and most of them will know where the rogues are. I have whistle-blown personally where a client was falling foul of advice and methods, and the FCA ignored me.
I’ve just had a 55 per cent increase in my FCA bill simply because of the unregulated claims we have out there. How can that be fair? What we want is a regulator on the side of the good guys, not to feel like we are fighting against it.
Deep data dives
Any expert on regulation will tell you that, while the advice profession obviously wants to minimise the number of these scams, eradicating them completely is not something a body like the FCA should strive for.
The cost of achieving a zero-failure rate is simply too high. The FCA could pack its authorisations team to the rafters but some highly intelligent yet deeply unscrupulous actor could still be guaranteed to find a way to ‘phoenix’, reappearing under a new guise after selling a host of toxic investments.
Solomon’s Independent Financial Advisers principal Dominic Thomas says: “The sad overarching truth is that the financial media, advisers, providers, government, HM Revenue & Customs and the regulator have failed to get the public to understand basic money realities, like ‘Too good to be true.’”
So, what does the FCA plan to do about it? The answer seems to be: get better at data. The FCA’s annual report cited innovation and technology as one of its six cross-sector priorities. Recognising that “data and intelligence have a growing role in regulation”, it is setting up a new advanced analytics team. Also in the works is an overhaul of the Gabriel reporting system and investment in the FCA Register.
If the FCA is trying to find the rogues, it’s not going to find them through data – they will manipulate it because it’s on a self-assessment basis
When it comes to advisers, there is no doubt that a very small number of firms are causing a huge proportion of the consumer harm in the market.
The FCA has made a good effort to get granular, with smaller, more targeted reviews in recent years. It looked into training and competence records for individual staff at advice firms and, when it reviewed ongoing advice, asked specific questions on aspects of the process that advisers charged for, from updating fact-finds and reviewing cashflow models to rebalancing and reviewing third-party service providers such as platforms.
The watchdog’s work to date on defined benefit transfers shows it is willing and able to target outliers in the advice market based on data – provided it is able to collect it, of course – with supervision director Megan Butler confirming that only after it had homed in on individual firms giving unsuitable advice and how they gave redress would it consider setting up a “broader scheme depending on the scale of the issue”.
What FCA chief Andrew Bailey had to say about the Woodford collapse
We view incidents like the Woodford affair as an example of where firms are following the letter, but not the spirit, of the rules. It raises questions about the rules themselves.
On the letter-versus-spirit point, we don’t have evidence to suspect that there are other firms acting in the way the Woodford fund did. If you watch the Treasury select committee hearing, that was on those particular Ucis rules which are around the proportion of unlisted assets that you can hold. In the past 12 months we had only one other firm that had a breach, and that was quite small and was corrected quickly.
It’s quite clear that being listed can mean many things, but it doesn’t mean an asset is liquid and it doesn’t mean it is traded. Of course, it’s true there are overarching objectives in terms of liquidity, but the detail of the Ucis really drives you to other channels that create this letter-versus-spirit thing.
I don’t share the view that open-ended funds are bad, but Woodford and calls on property funds, those are things about how to manage illiquid assets within Oeics.
But we do have to ensure we don’t reduce the availability of monies for investment in valued assets. What Woodford was holding was biotech and artificial intelligence startups. I offer no comment on how he managed the fund, but we don’t want to cut off investment in those sectors of the economy.
The changing face of suitability
Given that advice firms account for less than a tenth of the total number regulated by the FCA, and that they tend to have far fewer staff than other financial services firms, you might think the FCA would be tempted to draw its focus elsewhere. But this has not been the case. For example, the regulator has noted on numerous occasions the key role the IFA profession plays in stopping scams and money-laundering operations.
Yet the FCA faces huge challenges in putting a stop to emerging harms.
Whistleblowing by advisers is a key way to alert it to nascent scams – regulatory returns and product sales data always come after the fact – but every misselling scandal that slips through the net engenders mistrust in the IFA community, making it ever less likely to report scams.
There is no real reason for some of the data, but we do it because we have to
The boundary over what constitutes ‘advice’ is widely thought to be a mess, but the FCA can hardly trademark or protect a term like a private organisation can – the Personal Finance Society can sanction those who misuse the title of chartered financial planner, for example.
The FCA needs to forge strong links with professional bodies such as the PFS to gather intelligence on bad actors. However, given the financial incentive of membership fees and a mandate to represent the advice profession in a good light, there is an argument that there is little impetus for the likes of the PFS to investigate and report on those in its ranks.
Nor can the FCA give official backing to the directories or standards documents they produce without over-riding its own register or rulebook.
The Senior Managers & Certification Regime was lauded again at the FCA’s meeting as a step forward in this regard. Insisting on clear lines of responsibility and forcing high-ranking staff to attest that each person under them is appropriate for that job will certainly give leaders within firms a nudge to check out what their staff are actually doing, and the FCA will be able to trace failings more easily.
These rules are already a feature of the banking world, and they will be rolled out to the wider financial services community later this year. Remember, though, that advisers are a completely unique type of business. Applying something like SM&CR to them could cause a lot of stress, particularly towards the smaller end of the market that is still absolutely critical to the tens of thousands of retirees who rely on it to help manage their affairs.
Similarly, Mifid II’s cost disclosure and product governance rules have been a sticking point for the financial planning profession. Although the rules certainly can improve the quality of advice, particularly by shining a spotlight on the necessity for proper annual reviews, can the FCA expect advisers to keep ploughing resources into these while maintaining a commercially viable proposition?
While the FCA continues to speak about suitability in the holistic sense, there will always be grey areas in judging this, particularly as modern retirement planning becomes ever more complex. The regulator has given no hints that it will change the basic framework for what advisers need to do to assess suitability, as outlined in its Conduct of Business Sourcebook: they have to know the client’s objectives, make sure they understand the risks, and recommend plans that meet those objectives.
Hogwash. They wouldn't need to know that if the FCA prevented such claims being made to the public in the first place. They can't dump their responsibilities to protect the public back onto the public. If they do then let's just get rid of the FCA completely
— Chris Budd (@ovationchris) July 17, 2019
Picking up the pressure points
With the overarching framework of suitability set to stay put for some time to come, what suggestions for future reform can we glean from the FCA’s public meeting?
First, with the FCA now having a remit to ensure competition, some kind of review will have to be imposed on the IFA sector at some point. It has already reached the platform and asset management spaces, after all.
This could be significant if the FCA finds some planning firms are unfairly impeding clients from moving between financial advisers or being able to make a fair comparison of what they offer.
The FCA has already proved that it is not afraid to use its competition powers, having fined two asset managers – Hargreave Hale and River & Mercantile Asset Management – in February over breaches. (It would have fined a third, Newton Investment Management Limited, had the firm not been granted leniency for co-operating at an early stage.)
The FCA’s plan to study the effectiveness of the Financial Advice Market Review and the RDR also rumbles on, with the Asset Management Market Study leaving unanswered questions about the role of advisers in the value chain. Vertical integration in ownership structures, where fund providers also control platforms, discretionary management or advice propositions, and the potential conflicts of interest therein, have yet to be fully explored.
The very gradual ebb toward more firms being restricted will shine a greater light on this – not just in the form of in-house fund recommendations but also in a wider sense, where more and more advisers are looking at centralised investment propositions, white-labelled platforms or starting their own discretionary management operations; or, indeed, in the future, they may consider how all of this can be worked in to a centralised retirement proposition.
When the big firms get even bigger, oversight becomes easier but putting a real foot down to stamp out the worse practice gets harder, for fear of taking out entire firms with hundreds of advisers and thousands of clients between them.
It is the very definition of being stuck between a rock and a hard place – it is theoretically easier for the FCA to manage a smaller number of bigger advice firms, but it introduces more conflicts the more it encourages this model.
As Conduct Culture Ltd director Andy Sutherland puts it: “They know the questions, but they don’t necessarily know the answers.”
All got a bit out of hand?
That sounds like a staggeringly restrained set of hecklers… considering the deep-rooted corruption which is 'generously' waved through by the FCA.
— Geoff Griffiths (@Cheoffors) July 17, 2019
Moving the market dynamics
With these trade-offs to contend with, the FCA, in its most impactful statement all day, left open the door to the most radical of potential solutions: product regulation.
It may not sound like much but chief executive Andrew Bailey’s suggestion in the press conference that having products pass through the FCA before being approved “should be in the frame in terms of thinking about the [regulatory] perimeter” would, if enacted, be a hugely important volte face from the watchdog’s previous position that it was not a product regulator and would not white-list or approve particular instruments.
In the end, however, there are compelling reasons why this may not come to pass.
One is that the FCA appears liable for anything it gives its stamp of authority to and, under resource pressure as it is, would be unable to guarantee the safety of every regulator-approved product. That same apparent FCA seal of approval was a compelling factor for some investors to invest in collapsed mini-bond provider London Capital & Finance, for example, as campaigners made painfully clear from the floor of the auditorium on meeting day, yelling “Why did you tell us it was safe?”
The other reason is that, in the fund management and advice sector particularly, the regulator cannot be seen to be telling the experts how to do their jobs. In the case of Neil Woodford’s recent travails, Bailey shied away at the press conference from saying Woodford had made the wrong product picks (see box for his musings in full). He did, however, accuse Woodford of playing by “the letter but not the spirit of the rules”.
What is to stop other people doing the same as Woodford when the FCA regulates, vets or green-lights particular products? As with phoenixing, some compliance consultant will always find a way to show that this or that investment did in fact qualify for the particular treatment the FCA had said it would. All you would achieve then is to add to the weight of the FCA’s already-considerable rulebook.
It is equally unlikely that intervention will come in the form of regulation regarding the production of best buy lists. The FCA’s executive committee was asked about this at the meeting, in the wake of Hargreaves’ role in the Woodford affair.
Director of strategy and competition Christopher Woolard replied: “Provided [best buy lists] are transparent and impartial, how they are put together can play an important role, particularly for mass-market investors. That very much remains the case.
“Woodford causes us to pause on that sense of transparency, that there are no interests here – that is a particular issue we have seen further – and what we can do around that, rather than thinking best buy lists are in and of themselves inappropriate in some way.”
We are seeing some signs of the FCA’s willingness to swallow a bitter pill. It wants to improve access to advice
Treading with care
Despite compelling reasons why further FCA intervention in the advice market may not be forth-coming, the facts are that, while adviser numbers, revenues and profits are up, the number of people receiving bad advice is also rising – in relation to both the regulated sort through defined benefit transfers, esoteric Sipp investments or otherwise, and the unregulated sort in the form of outright scams. The rational response from the regulator must be to find ways of tightening consumer safeguards.
Nor does the advice market appear persecuted when more and more members are training to a higher standard – the proportion of advisers currently holding chartered status is approaching 40 per cent, with a further 12 per cent planning to attain it, according to Money Marketing and search firm BWD’s 2018 adviser census.
We are seeing some signs of the FCA’s willingness to swallow a bitter pill. It wants to improve access to advice, as evidenced by FAMR, the advice unit for digital solutions, and new rules on streamlined advice, for example, but is also willing to step towards consumer protection at the direct expense of advisers. This is illustrated by its move to increase Financial Ombudsman Service compensation limits in the full knowledge that planners would face professional indemnity insurance pressure.
As Randell told members of the press, “We didn’t say we were happy about it” but the potential reduction in the number of advice firms was a necessary trade-off for proper consumer protection.
The future of the FCA will depend on how many more of these tough trade-offs it is willing to make.
Expert view: Phil Deeks
FCA is a lot more joined up than it used to be
You are totally right about resource pressure. The FCA spends so much time thinking about how to reorganise and better ways to do things.
They’ve started thinking: ‘We are going to trust firms a bit more; we can set the direction but they will put in the hard work to do it.’
There are no easy wins. If the reversal of a blanket rule may not be a problem, I don’t see why the FCA can or would want to do something. Take contingent charging as an example. How can you dictate what my charge is? Next-generation clients with smaller pots you might be prepared to work with on a loss-leader basis, since they’re the clients of the future.
There is a risk of the FCA doing things then sounding apologetic about it. Back around the time of the RDR, on the subject of bank advisers leaving, [former advice director] the late Linda Woodall said she didn’t see the need to apologise for a shortage of bad advice. The bigger picture was the FCA needed to make a stand on issues like the FOS levy recently.
It’s a lot more joined up than it used to be. You used to look at the risk outlook paper and just read your chapter because whatever else was happening there was no read-across. Now you get clear cross-sector issues.
Some don’t see the value of new rules like product governance. Some don’t understand why they have to do it. But if you approach them for what they are trying to achieve, get really robust and set up a mechanism to follow up, you’ve got a great feedback loop from your customers that you’ve got the right products with the right features. Firms at the moment are thinking more about costs than value, but over time they will look at softer and outcomes-focused features.
New products tend to be thought about more from the customer’s perspective, but we don’t see it as much for existing products. Do they go through that degree of rigour? But the FCA can’t say a product is suitable because it might be for you but not for me.
From an expertise point of view, there are people in the FCA with specialist skills to get their respective bits done across legal, marketing, compliance, etcetera. But there can’t be a person at the FCA who understands all of that for a given product. You will never get signoff, but you may get a steer or a push.
Phil Deeks is director at the regulatory and risk insight centre at KPMG