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Robo-advice and new FCA rules set to take centre stage

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Robo-advice, a new advice framework and the challenge of meeting new capital adequacy rules look set to be the regulatory issues that dominate in 2016.

Advice firms have been told to brace themselves for yet more change in the form of a new leadership team at the FCA, as well as reforms to the advice rulebook as a result of the ongoing Financial Advice Market Review.

The appointment of a new chief executive at the regulator is expected in a matter of weeks, with acting chief executive Tracey McDermott tipped for the role.

But independent regulatory consultant Richard Hobbs believes there is still more change to come.

He says: “Once the new chief executive is appointed, they are likely to ring the changes, both in terms of personnel and the organisation. The FCA, in managerial terms, is in a bit of a mess and the new head may set about refreshing the top team. These appointments might not necessarily be better, but they will not have the baggage of the previous team, and will come with a more open mind.”

Once the new chief executive is bedded in, they will have to quickly get to grips with the findings of the advice review, expected to be published before the March Budget.

The remit of the review, carried out jointly with the Treasury, is to examine the advice gap, regulatory barriers facing advice firms, and the role of technology in “cost-effective” advice.

It will interact with existing FCA initiatives such as Project Innovate, which aims to provide regulatory support to firms wanting to launch financial products and services.

Hobbs is concerned the FCA is pinning its hopes on robo-advice and technology to plug the advice gap.

He says: “Consumer engagement with financial services needs to be improved, and that is the elephant in the room. The great white hope at the moment is robo-advice, but I am doubtful about that.

“These systems will get better and better over time, and consumers will begin to engage with them. But this would be engagement on quite a superficial level.

“What happens when the investor doesn’t understand what they are reading? An adviser will spot a quizzical look and ask the client about it. A system can be structured to clear some of these kinds of obstacles, but it can never be as intuitive as a good adviser.  Self-help can only get you so far.”

Away from the advice review, law firm DWF partner Harriet Quiney predicts there will be more fallout to come from the use of aggressive tax avoidance schemes.

She says: “HM Revenue & Customs is gradually mopping up these schemes, but there is still work to do and if advisers and accountants have been involved, they could be vulnerable.”

She suggests at a wider regulatory level the increase to capital adequacy requirements may be a concern.

Last month the FCA confirmed plans to hike the minimum capital adequacy requirement from £10,000 currently to £20,000 by 30 June.

Advisers will have to hold either 5 per cent of investment business annual income or £20,000, whichever is higher.

Higher capital adequacy requirements for smaller firms will be phased in over the next 18 months.

Quiney believes the new requirements, combined with an already challenging market for professional indemnity insurance, will make it difficult for some firms.

She says: “The FCA’s approach to capital adequacy can be quite heavy-handed. Yet equally, businesses don’t necessarily appreciate how quickly their capital can disappear if they have a number of complaints.

“Most firms don’t have to deal with a raft of complaints. But you only need one adviser to decide something like Arch cru is a good investment, they sell it to 15 people, then it falls over, then it is 15 times the cost of the excess.”

Quiney adds: “The interplay bet-ween capital adequacy and PI cover is an issue for firms, and advisers will need to think about this quite carefully.”

Adviser views

Tom Kean, Director, Thameside Financial Planning

I would like to see the absence of input from the regulator this year, but I fear what we will get is the opposite. I am not sure the advice review is going to amount to anything more than the regulator justifying its existence.

Tim Page, Director, Page Russell

The success of robo-advice will come down to catching the right wave at the right time. My big hope is robo-advice can drive efficiencies in admin and back- office systems, and ultimately translate to an improvement in face-to-face advice.


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There is one comment at the moment, we would love to hear your opinion too.

  1. “Consumer engagement with financial services needs to be improved, and that is the elephant in the room…….” Every time I hear the phrase Consumer engagement it makes me cringe. I came in to this business in May 1989 and I don’t know about the vast majority of advisers out there, but those I talk to all say the same thing. Our clients couldn’t give a stuff about the mechanics of how it works, they just want us to show them a solution to their needs, thats it. I have never heard such inane drivel anti makes me really angry. If I need a hole in a wall 1/8th of an inch in diameter I go off and buy a drill bill that will do what I need. I don’t want to know about the properties of how the drill bit is made, what it is made from, who makes it. I all need it to do is to drill a 1/8th wide hole. Clients are no different, we establish needs/objectives and the next time they see us all they want to know is “Does what you are presenting me with do what I need it to”? Mr Hobbs, Engagement?????????? please, give me a break.
    It is my view that it all started to go wrong when total transparency came it. Don’t get me wrong the re are definitely thing that a consumer needs to know and how much do I have to pay for it”? (thats the “Does it do what I need”? part). There are things that the consumer may well want to know and that is fine but there is a pile of stuff that they don’t need to know but are forced to listen to or read about due to the OTT regulations. Unfortunately it is the latter that makes up the huge majority of the cr*p that we must go through and they must hear or read. It is a truly pathetic state of affairs and is unlikely to change because this entails the regulator admitting they have got it wrong and that, they will never do. They use spin like “it is not delivering the outcomes we anticipated” or “It is currently not working was well as we had hoped”. You are unlikely to hear them say “We actually got this completely wrong and should return to the previous rules as in hindsight it was actually ok”.
    To even replace rules with new ones would be a start, not just add more to the monumental rulebook.
    Just my own humble thoughts of course

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