The FCA has sent a strong signal to the retail investment market that it intends to stamp out unsuitable advice and improve competition in the platform market.
In a raft of documents this week, the regulator published its business plan for 2017/18, its house views on sectors including retail investments and pensions, its new “mission” document, and a consultation on regulatory fees advisers are going to pay next year.
Some of the headline findings, particularly on advice suitability, amount to a warning shot for advisers that the regulator wants them to improve disclosure and ensure recommendations are risk-appropriate.
Taken to task
The release of the sector views is the first time the FCA has made public its opinion on the specific risks within various markets.
One of the main claims from the regulator on the retail investment sector was “relatively few advisers are transparent about their pricing before they sell advice.”
The regulator argues unsuitable recommendations may be being made because of “insufficient competence” on the part of the adviser, or because they failed to take into account conflict of interests. The FCA’s suitability focus also extended to automated advice, and it says dependent on how fast the robo-advice market grows, it may begin testing the suitability of the advice resulting from automated service.
At a press conference in London this week, FCA executive director of strategy and competition Christopher Woolard told Money Marketing there was “no magic number” when it came to suitable fees, but advisers should be clear to clients when they are putting them in passive as opposed to actively managed solutions.
The FCA also said it would “carry out further work to target those firms providing unsuitable advice about complex products.”
The regulator has been carrying out a review of advice suitability since last April. In its latest flurry of documents, the FCA says: “Firms do not always consider consumers’ needs and outcomes appropriately when they develop products, distribution propositions, and offer wealth management services.
It adds: “Advisers may give insufficient attention to the total cost of investment products and of advice, which results in poor value for money for consumers.”
Aspect8 financial adviser Claire Walsh says charge transparency has “come a long way” but is still progressing.
She says: “The RDR was only four years ago. In general terms our industry has evolved quite quickly and it has undergone an awful lot of changes in recent years if you compare it to something like the legal profession. We are in a state of flux still and it is still evolving.
“You have to communicate your charges in your terms of business and you are supposed to provide these to clients before business is transacted. In terms of how people do that, we do not necessarily have tables on our website that give costs. Generally, things are done on a proportion of assets. I agree with the sentiment consumers are probably unsure of how much things will cost. I find when people phone up the first time they might ask and they are quite nervous about it all.”
Nutmeg chief executive Martin Stead says the FCA’s focus on charging and transparency is to be welcomed.
He says: “The FCA is set to shine a light on problems such as complicated charging structures that make customers’ lives worse. The more the regulator can drive progress on transparency, consumer choice, and downward pressure on charges, the better.”
The Consulting Consortium advisory director Phil Deeks argues as an overarching priority, the FCA is moving its attention away from advice because advisers have been able to demonstrate suitability in the regulator’s recent review of client files.
He says: “The FCA’s 2017/18 business plan, despite being more comprehensive in scope, does not demonstrate a significant departure from the regulator’s previous approach. One exception, is the focus of this year’s cross-sector risks, which has moved away from pensions, wholesale and advice in favour of competition and vulnerable customers.
“This movement away from a focus on advice is likely to have been driven by the positive results of the regulator’s suitability review, but it is noteworthy the FCA hasn’t formally committed in its business plan to publishing the findings. Failure to do so would be a significant opportunity missed and wouldn’t be in keeping with the FCA’s renewed appetite to be more open and transparent.”
Platform and provider pressure
Platforms will also face increased regulatory scrutiny, as the FCA has announced it is launching a review into both direct-to-consumer and advised platforms to see if the market is working for consumers.
The regulator has raised concerns self-directed investors could be receiving products that are too risky for them or poor value for money.
Stead believes the increased focus will be good for the market.
He says: “The FCA’s interest in promoting competition among platforms is welcome. Anti-competitive charges on withdrawals and switching continue to hurt consumers, especially in the pension market. These charges, which in our view should not exist at all, are often far in excess of the administrative costs of closing a customer account.”
The value of advice was a recurrent theme throughout the reports, underlined by the FCA’s announcement of its thematic review into non-advised drawdown sales.
Providers from across the market, including Sipp providers and insurers, can expect to receive data requests from the regulator on both oral and written communication with clients, training manuals and other sales scripts.
The regulator will attempt to discover whether customers were given enough information to make the right decision before sale, and if they could continue doing so with the post-sale information provided by firms.
Ahead of the thematic review, Standard Life and Prudential have each set aside £175m for separate reviews into non-advised annuity sales. Aegon pensions director Steven Cameron called the drawdown review “an FCA endorsement of the value of advice at retirement” while a number of providers defended their record on non-advised drawdown.
Hargreaves Lansdown head of policy Tom McPhail says: “We have pioneered this market and we have been a leading player in driving better value for investors and negotiating with fund managers to bring down their prices, and we actively engaged with the FCA across the FAMR review, the retirement income study and the asset management study.
“We will continue to play a proactive role across all those themes but we welcome the FCA’s continued work in those areas.”
What is not there?
There are several aspects of the financial services market that experts were surprised to see missing from the regulator’s priorities.
One of these is defined benefit pension transfers, which were not mentioned across the business plan, mission or sector views, despite being previously highlighted as an issue by the regulator.
McPhail says: “I know it is on the FCA’s radar and while it didn’t feature in their business plan it is something they have been looking at and I expect we will see more work on that question as the year progresses even though they have not flagged it.”
Meldon & Co managing director Mark Meldon agrees complaints may arise from DB transfers in the near future that may catch the regulator’s eye.
He says: “The next big rumble will be on DB transfers. I am licensed to do them and do them if it is appropriate. But it is a very difficult exercise and there are practical problems, including that you cannot get the transfer analysis reports done in enough time.
“Also, people forget we have had a buoyant stockmarket for the past two or three years since pension freedoms came in but sooner or later there will be quite a big fall in the market and people in drawdown may feel rather worried and that will probably give rise to complaints.”
There was also no hint on general findings from the ongoing advice suitability review. Advisers may have to wait longer than they expected for any guidance or best practice, with the FCA saying its follow-up work will be complete by next year.
Following threats to take a closer look at vertically integrated firms – those that offer products, platforms and advice – the FCA appears to have softened its stance on the consumer detriment that might be being caused.
FCA supervision director Megan Butler told the press conference ongoing supervision of vertically integrated firms was sufficient and there was “no reason for a new policy initiative”.
Chief executive Andrew Bailey agreed, arguing a distinction needed to be made between theoretical objections to vertically integrated structures and necessary intervention over competition concerns.
Expert view: Brexit shouldn’t slow down regulatory progress
Brexit might only have been mentioned once in the FCA’s mission paper consultation, but it looms large over the series of papers published this week. A good bit of news in last year’s consultation and the mission plan was the commitment to a review of the handbook. This has now been delayed until we know more about the terms of our withdrawal from the EU. Although this makes sense, we hope progress will continue to be made on streamlining and improving accessibility of the handbook in the meantime and will work with the FCA and others to do so. The FCA has also increased its annual funding requirement for 2017/18, citing its work on EU withdrawal as one of the reasons behind this shift.
Advisers should also take note of the focus on retirement income in the FCA’s business plan. Key stated issues and risks are the quality of advice around retirement income and that consumers do not want to or cannot take advice on their retirement savings.
There will also be a consideration of possible rule or legislative changes to close loopholes and deter fraudsters. I hope this will include an examination of rules which currently allow advisers to certify individuals as sophisticated investors, enabling rogue advisers to then recommend investments in unsuitable or fraudulent schemes.
Caroline Escott is senior policy adviser at Apfa