FCA to 'take its time' with advice-guidance review

Speaking at Pimfa’s Compliance Conference today (September 21), Castledine said the advice-guidance boundary review is a substantial piece of work and stakeholders have told the regulator to take its time to get it right.

“It has the potential to lead to wholesale restructuring of the regulatory framework for advice and guidance,” she said. 

“We have been told to take our time. This is difficult. We need to make sure we get this in the right place. 

“We have tried before, and we’ve made advancements, but this is really a fundamental opportunity for us against the backdrop of European legislation falling away to make a real difference.”

This comes as earlier this week, the online safety bill passed its final parliamentary debate and is now ready to become law.

Castledine said the advice-guidance review would seek to ensure that consumers “get the help they want, at the time they need it and at a cost that is affordable to them”. 

The review by the FCA had been launched in response to a number of risks of consumer harm the regulator had identified. 

These included developments in social media and digital technology, which had “opened up access to investing to many more people” in the UK, but which had also increased the risk of consumer harm.

Castledine said the Treasury in conjunction with the FCA will be publishing an initial policy paper before the end of the year that would outline options and seek feedback from the industry.

Crypto and other harm

Castledine also said that consumers can “now easily invest in high-risk investments” and it is vital to ensure they are “as well equipped as possible” to make investment decisions.

The FCA had identified three further key consumer harms that it was seeking to address through its review of the advice/guidance boundary. 

Firstly, many consumers who might gain through investing were holding their savings in cash, the value of which over time would be degraded by inflation. 

Secondly, many consumers “do not have the level of income they expect for their retirement” and finally many consumers were “not making effective, timely and informed decisions about their pensions”.

“Long-term social, economic and demographic changes have made the consumer investment market more important than ever before with consumers having more choice of products and services than they have done in the past,” she said.

“We think more can be done to support consumers to help them engage with their finances and make better investment decisions,” she said. 

 Good practice in the AR regime involves principals having established onboarding and oversight checks for their ARs.

“This could include more tailored guided services and simpler advice services. Though we understand the current regulatory framework may pose challenges to further market development to sufficiently meet consumer needs.”

Discussing crypto financial promotion rules, she said many advisers have a role in advising on high risk investments, or more relevantly, may be considering or may be being approached to become a section 21 approver for crypto firms.

“Crypto presents risks in the consumer investment space,” she said. 

“Consumers may be scammed into investing in crypto assets that are not genuine or receive promotions that do not properly set out the high risks of investing in certain crypto assets even where the assets are genuine. 

Castledine said given the decentralised nature of the technology, crypto is attractive to bad actors seeking to launder their funds.

“It is in all of our interests to reduce the reputational damage to the investment market that comes from fraud and scams,” she said.

“From October 8, UK consumers will have greater protection as crypto asset firms' marketing must be clear, fair and not misleading, labelled with prominent risk warnings and they must not inappropriately incentivise people to invest. 

“These rules apply wherever the firm's are based globally and help strengthen how people are protected from the high risks associated with crypto assets.” 

She explained that the financial promotion regime will be the first conduct regime for the sector and represents a fundamental change to how crypto asset activities are regulated in the UK. 

“We expect the vast majority if not all crypto asset firms and providing services to UK consumers will be in scope of the regime when it comes into force and into force in a couple of weeks,” she said. 

“Anyone who continues promoting crypto assets to UK consumers past the October deadline without complying with the rules may be committing a criminal offence which is punishable by an unlimited fine and or up to two years imprisonment.”

Intermediaries like payment firms, social media platforms and app stores play a critical role in enabling crypto asset firms to target UK consumers.

All these intermediaries therefore have a crucial role to play in protecting UK consumers from illegal promotions.

“We expect these firms to seize supporting and facilitating unregistered crypto firms illegally marketing to the UK.”

In addition to this, Castledine said the FCA has seen some instances of financial crime and anti money laundering failings in the principal and appointed representatives setup as well. 

In December 2021, the FCA made changes to the AR regime and strengthened rules, which have been enforced since December 2022, to make principal firms more responsible for ARs. 

A key element of the enhanced requirements is that principals must review each AR at least every 12 months to include the fitness and proprietary of senior management management of AR and their competence. 

They must also oversee the ARs financial position and take a step back to look at the adequacy of their own controls and resources to oversee the ARs.

“Good practice in the AR regime involves principals having established onboarding and oversight checks for their ARs.

“Our 2021 data collection showed that most firms are doing on a repeated basis regular checks on suitability, financial reviewing the financial position and on criminal records and undertaking criminal record checks. 

“However, there are outlier firms that don't undertake the necessary checks.”

In one case in the consumer investment sector, a principal allowed an AR to undertake activities that they were not permitted to carry out, including managing investments. 

The AR was also issuing misleading financial promotions and was not undertaking the proper AML and financial crime checks. 

“If you are a principal firm, you should ensure that you have your appropriate controls in place to effectively oversee your AR activities and ensure that your AR comply with the consumer duty and financial crime controls,” she said.

“Controls become even more important if you're operating as a regulatory host, where the principal firm may be smaller than some of the ARs they may be overseeing and also include a very wide range of diverse business models.”

sonia.rach@ft.com

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