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Simon Collins: Stress-test your business model

The FCA is increasing its focus on models across the sector, so take the time to check yours is up to scratch

I have been fortunate to spend some time recently talking to a number of financial planning firms about their business models, future plans, and current and anticipated challenges. Despite obvious uncertainties surrounding Brexit and the economic situation, I have witnessed a general air of confidence in the sector.

A number of firms have virtually reinvented themselves, overhauling internal systems, improving technological capabilities, and investing in people with new skill sets or ideas.

In addition, many have redefined their purpose, whether that be striving to provide a level of service that sets them apart from the pack, or including a focus on community support or involvement with local schools and universities, to improve the younger generation’s knowledge of financial services.

Yet despite these positive enhancements, one area that does not seem to have changed particularly is charging structures.

Yes, some are moving to a fixed fee or hourly fee rate, but many are still working on a percentage of assets under advice basis – both for initial advice, and ongoing planning, review and management.

Of course, firms can set their charging structures how they like, as long as they are meeting expected conduct-of-business regulatory requirements and principles; notably, treating customers fairly, and clear, fair and not misleading communications.

However, we detect an increased level of interest by the FCA in firms’ business models.

The asset management industry will be subject to the value-for-money requirement later this year, and it is highly possible we could see a read-across into other sectors of financial services in due course.

It is also worth reflecting on a number of messages coming from the regulator in relation to business models. At the recent British Insurance Brokers’ Association conference, FCA director of general insurance and conduct specialists supervision Karina McTeague shone a light on business models within the insurance sector.

“We expect firms to look forward, by testing the sustainability of their business models and strategies in light of threats and opportunities,” she said.

“Their analysis should include consideration of possible consumer harm arising from:

  • Operational resilience;
  • Fraud;
  • The impact of incentives and rewards on individuals’ behaviours, such as driving inappropriate sales;
  • Budget pressures on critical functions, such as risk, compliance and HR.

“A keystone of any sustainable business model and strategy must be customers’ trust.”

As with many of the speeches from senior members of the FCA, there was a constant reference to the culture of a firm and the potential for customer harm through the behaviour of individuals within it, its business model, or both.

Underpinning the regulator’s focus on culture is the implementation of the Senior Managers and Certification Regime. There are four key areas the FCA will be looking at as it begins to supervise firms once the regime is in place at the end of the year. These are:

  • Purpose: This centres on what the firm is all about, what it stands for, how it makes money and what its attitude towards its customers is;
  • Leadership: This relates to the quality of those individuals running the business, the messages they provide to staff, and the examples and standards they set and expect to be judged against;
  • People: This refers to how competent people are throughout the firm, how they are remunerated and what behaviours they display;
  • Governance: This focuses on how the firm operates; the structures and frameworks it creates to ensure appropriate accountability and transparency.

It is refreshing to see some of the initiatives that have been undertaken by firms and the passion individuals within them have for the further professionalisation of the financial services industry.

A number of these individuals are driven by creating a strong legacy for future generations of advisers and making a difference to their clients.

Taking some time out to scrutinise a business model – how it makes money, incentivises staff and adds value to clients – would be well spent, notwithstanding the FCA’s increasing focus.

Simon Collins is managing director, regulatory, at Eversheds Sutherland


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