This looks set to be another big year for regulation as advisers await the results of the FCA’s suitability review and expect the regulator to intervene on advice market competition and pension transfers.
First on the agenda for the new year is the publication of the FCA’s new Mission document, which will set out the philosophy behind the regulator. But it is the conclusion of ongoing work such as advice suitability that could have the most significant impact on the market.
The regulator first wrote to around 700 advice firms as part of a mass data gathering exercise in April. Money Marketing understands the regulator has still not decided on the precise format in which it will publish the results.
Former FCA technical specialist and consultant Rory Percival says: “Given the suitability review was such a big piece of work with so much evidence available, there’s some useful stuff likely to come out.
“There’s no guarantee the FCA will publish anything at all, but that’s unlikely because one of the objectives was to feed back to the sector. There will be a good and bad practice publication.”
Competition is coming
As the FCA’s remit to improve competition begins to bed in, regulatory experts are also tipping the advice market as the target of a competition review.
The FCA questioned how the vertical integration of advice, the growth of model portfolios and the way third-party ratings providers operate impact on competition in the advice market in its interim report on the asset management sector. It has proposed further work on what impact advisers and platforms have on value for money in the distribution chain.
The Consulting Consortium advisory director Phil Deeks says: “It will be interesting to see the degree to which the FCA starts using its competition powers within the advice market, particularly around whether advisers are delivering value for money. This is not just in terms of the value for money of any ongoing service, but also in terms of the total costs of the client/adviser relationship.”
Percival says the advice market could find it tought if the regulator did decide to assess the level of competitiveness in the profession.
He says: “If there’s a market study on competition in the adviser market the regulator will find fairly similar results as it did in the asset management sector. There will be similar results of significant concentration of the advice charge, particularly on an ongoing basis around 50 and 100 basis points. They will also find that there’s probably not a particularly strong correlation between cost of advice and quality of advice.
“It wouldn’t be able to make a judgement on value for money as it did with the asset management sector and active managers, it’s just too difficult to do. But it will also find that the market for advice is not competitive. There’s no driver to reduce prices, no competitive drivers for clients to seek out more cost effective advice.
“What can the regulator do? Not a lot. It can tinker around the edges but it can’t turn a sector that’s got fundamental competition flaws into one that’s far more effective.”
Percival adds the regulator may also look at competition in the platform market further down the line.
Percival says: “I suspect there are possibly other priorities. There’s less likely to be a market study for 2017, there’s more likely to be a sense check around replatforming, data security and switching between platforms.”
Susan Hill Financial Planning chartered financial planner Susan Hill
One of the things the FCA will want to see is how adviser charges are working for ongoing service, and that each firm has got an ongoing process written down and the client knows exactly what they are getting. What we might see is the FCA saying if the client has not been given something you should not be charging them.
The FCA may start to think, four years on from the RDR, that it needs to make sure that it is working if they do not see clients getting value for money.
Demand for defined benefit pension transfers is also expected to increase over the coming 12 months. As pension freedoms hit their two-year anniversary, it is thought the FCA may need to go further than its current consultation work, which is limited to changing the redress methodology for bad DB transfer advice.
Optima Regulatory Strategies consulting director Esrar Moitra says: “The FCA has got to start looking into DB transfers. People have been saying they have had their finger off the pulse and there has not been that much communication around what the adviser standards are, what their concerns might be or what good and bad practice is.
“Pension freedoms was a huge reform. The regulator could have gone out immediately to see what the shape of the market was, or it could have waited enough time to ensure whatever analysis or investigation they want to do is representative. The FCA is possibly playing catch-up here.”
Key dates for regulation in 2017
26 January: FCA’s Misson consultation closes
8 March: Final Spring Budget
31 March: Financial Services Compensation Scheme funding consultation closes
April: Lifetime Isa launches
Q1/Q2: Report on progress towards implementing the Financial Advice Market Revew recommendations
Q2: FCA final report on asset management market study
Q3/Q4: Review of professional indemnity insurance market launches
Autumn: New FSCS rules announced
The Consulting Consortium advisory director Phil Deeks
Culture remains high on the FCA’s agenda, with one of its final acts of 2016 being to publish two occasional papers on the wider psychological and social influences on compliance, culture and individual behaviour within financial services. With these papers it is clear that the FCA is trying to reinforce the importance of individual morality and responsibility, as well as encourage firms to take action to ensure their culture is delivering positive outcomes. It’s clear evidence of the emphasis the FCA puts on the effect culture has on the conduct of a firm. Advisers should be taking steps to examine their culture and mitigate any risks that could be potentially leading to poor consumer outcomes.
The outcomes of the FCA’s ongoing suitability assessment work will hopefully provide the industry with a more meaningful steer around the regulator’s expectations around suitability reports, although, the recently released Apfa guide does go some way to updating the industry’s knowledge of the FCA’s thinking in this area.
The FCA’s proposed amendment to the definition of financial advice should make the provision of information easier, which will help equip consumers with the knowledge they need to make an informed choice. The adviser’s role in this should be to assist consumers in assimilating the large volume of information and personalising it. We are also more likely to see more advisers being supported by a wider number of centralised investment propositions as the boundary moves towards a truly personal recommendation.
Arguably, it also gives firms a greater licence to automate and centralise guided, non-advised sales on a non-personalised basis. Both the amendment of the definition of advice and the establishment of the FCA’s Advice Unit are expected to help address the perceived advice gap and it will be interesting to see whether it does result in more mass market solutions delivering good customer outcomes at scale.
Ultimately, with the current rate of change within the industry, advisers need to adapt to the digital age to ensure they continue to provide suitable advice in a market where customer lifecycles are becoming shorter, otherwise they will be left behind.