Financial Conduct Authority  

Five takeaways from the FCA’s consumer investments strategy

Five takeaways from the FCA’s consumer investments strategy

The Financial Conduct Authority has today published its strategy on how it will tackle investment harm and ways in which it will improve the advice market, including the cost of regulation.

The City watchdog plans to gradually reduce the Financial Services Compensation Scheme levy, which advisers have seen soar in recent years, as well as tackle rising professional indemnity insurance costs.

It also revealed it will increase its scrutiny of principal firms, especially with regards to their oversight of their appointed representatives.

Here are the key takeaways for advisers from the regulator’s strategy:

1 Reducing FSCS costs

The FCA wants to stabilise, and eventually reduce, the amount levied through the FSCS funding class that advice firms fall into, the Life Distribution & Investment Intermediation class.

But advisers will not see the effect of this anytime soon, as the regulator is looking to achieve 10 per cent year-on-year reductions on the levy from 2025 to 2030.

To reduce this bill the FCA will work on addressing poor advice, strengthening capital standards and reviewing the FSCS compensation framework.

It also suggested that it could review the amount of FSCS redress given to savers who “make an active choice to purchase particularly high-risk investments”.

Read also: FCA explains 10-year FSCS levy strategy

2 Clamping down on principals

Principal firms are behind a larger share of FSCS claims than others, with non-principal firms in 2018-19 H1 amassing £392.6m in claims compared with a much higher £641m for principal firms and their ARs.

Problems with how principal firms take responsibility and have oversight of their appointed representatives has been raised by the regulator before but the FCA is now pushing to make changes in this area.

Firstly, the FCA will ask for legislative changes to be made and it will then look at changing to its own rules in this area, and to clarify its expectations of principal firms. A consultation is expected later this year.

This is with the aim to allow it to better challenge principals on their ability to oversee the activities of their ARs, before harm occurs. In turn, this should improve the quality of their advice, the FCA said.

3 Showing insurers good advice exists

The FCA acknowledged the professional indemnity insurance market had hardened with increasing costs and more firms finding it harder to obtain the necessary cover.

The number of active insurers has fallen from about 15 to five in the last five years and firms who advised on defined benefit transfers in the past have seen their bills increase from around 1-1.5 per cent to 3-6 per cent of firm income, the FCA said.

Therefore, the regulator is considering to introduce third party audits so firms can show they are giving good quality advice and PI insurers can offer them insurance at a fairer price.

4 Changing the rules for guidance

To get more people investing their money, the FCA is looking at ways to tweak the rules around guidance on straightforward products such as Isas and tracker funds.