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Pressure points

You might think that the FSA is too preoccupied with the financial stability of banks to worry about adviser firms at the moment. But remember that the regulator has hundreds of staff in its small firms and retail themes divisions and their work is still focused on issues affecting adviser firms.

What areas is the FSA likely to concentrate on as it assesses the risks posed by adviser firms in the current economic climate?

Switching and Churning

Churning is an obvious risk to look out for when advisers’ incomes come under pressure.

The regulator has already published the findings of its review on personal pension switching, in which it concluded that too many switching transactions are carried out for artificial reasons. In other words, they do not result in any genuine net benefit to the customer.

The FSA has invited firms involved in pension business to roadshow events and will be carrying out another review of pension switching advice later this year.

The regulator has also taken the unusual step of publishing a template for checking the suitability of pension switch files which reflects the approach its own supervisors will adopt. Now would be a good time to check a sample of your recent pension switch business using the FSA’s file review template.

Churning does not just affect pensions. You do not have to be clairvoyant to predict that the FSA will be looking out for other areas of unjustified switching this year and investment bonds and remortgages are two likely candidates.


When income is falling, one response is to move into a new area of advice.

Many firms that have concentrated on mortgages during the good times are now returning to designated investment business or entering that market for the first time. Others are looking at areas such as equity release or business protection.

There is nothing wrong with this approach but you must have the up-to-date knowledge and skills to provide high-quality advice, and put appropriate supervision and monitoring arrangements in place.

The director of the FSA’s small firms division recently warned firms not to move into new areas of advice unless they can ensure customers are treated fairly. Expect a thematic review involving firms that have suddenly started writing new types of business.

Supervision of specialist advisers

As firms cut costs, one area that can suffer is supervision of specialist advisers. Who else in the firm is competent to monitor the quality of their advice? If the answer is no one, is the firm engaging external expert help to monitor advice quality?

The key point is that if you cannot monitor the quality of specialist advice effectively in house and you are not prepared to pay for outside help, you would be wise to refer the business to another adviser firm.

Acting outside permissions

When firms shed advisers, they may be left with no one to service existing customers for certain specialist types of business. Rather than admitting they cannot help, there is a temptation to act outside the permissions of the remaining advisers.

We know that the FSA is on the lookout for cases of advisers acting outside their area of competence, so make sure you refer any specialist business to appropriate third parties when you do not have the competence or authority to deal with it yourself.

Financially weak firms

The FSA analyses RMAR data to identify firms not meeting the threshold solvency conditions or that may be tempted to cut corners to make up for a sharp fall in income. The FSA visits a sample of financially weak firms to check whether their situation leads to unfair treatment of customers.

Mortgage and property fraud

From the FSA’s perspective, the regulatory risks posed by mortgage brokers have been reduced due to the tight lending criteria in the current market and its focus is moving back towards investment advice. The one exception is outright fraud and the FSA will continue with its recent focus on detecting and cracking down on fraud in the mortgage and property market.

It is worth noting that the FSA’s recent Financial Risk Outlook publication commented that standards of mortgage advice have not improved significantly, so it expects problems with unaffordable and unsuitable mortgages to re-emerge when the market recovers.

Data security

Fighting financial crime is high on the FSA’s priority list and we know that the regulator is very concerned about the general lack of data security controls in adviser firms which makes them vulnerable to attack by criminals looking to steal sensitive personal inform-ation about customers.

The FSA has published a factsheet on data security for small firms and you would be wise to read it and consider how to deal with the important issues it raises.

Regional TCF assessment for small firms

The final industry deadline may have passed but treating customers fairly has not gone away and the small firm assessment programme is only a third of the way through. It continues throughout 2009 and 2010.

The current area of focus is the South-west. The FSA has not published details of the regions to be targeted in the rest of 2010 but, anecdotally, we are hearing it is moving into the South-east next.


Broker Talkback

Do you agree with the FSA’s move away from principle-based regulation?

Yes 63%
No 37%


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