RegulationNov 18 2016

Apfa accuses FCA of attacking problems it created

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Apfa accuses FCA of attacking problems it created

Chris Hannant has criticised the Financial Conduct Authority’s claims that advice may not provide value for money.

The director general of the Association of Professional Financial Advisers said that if advice costs a lot, it is because of the FCA’s own doing.

He said: “It does costs a lot to deliver advice because of the liability, because of the framework the FCA has created.

“You have just got to look at the profitability of the sector to see that the margins are wafer thin. It is not like people are trousering loads of money.

“If they want to look at the cost of advice we are happy to help and if they want to rectify it we have got some ideas.”

According to Apfa’s latest Financial Adviser Market in Numbers report, firms made an average profit before tax of £158,667 in 2015.

Meanwhile retained profits - retained by the company to be reinvested in its core business - were only 1.44 per cent of total regulated business revenue.

This morning the FCA published a paper which criticised the fund management sector for “limited” price competition for actively managed funds, meaning investors often pay high charges “not justified by higher returns”.

But the paper also revealed the watchdog has concerns about the value after cost provided by financial advisers and platforms, and is planning to look into the sectors further.

The FCA also found potential issues with adviser networks and so-called ‘vertically integrated’ firms, which house both distribution arms and product providers, were also raised in the paper.

It noted that where adviser networks may make funds available exclusively to financial advisers who are part of the adviser network, these networks have a commercial interest in promoting their own funds, as the network generates revenue from the investors that choose the in-house fund or portfolio.

Mr Hannant said he did not mind the FCA looking at this issue, but said a framework for being vertically integrated already exists and the problem came down to one of suitability, which the FCA is already looking at.

The FCA's report found found “limited price competition” for actively managed funds and that, on average, such costs were not justified by higher returns.

The regulator went on to warn that fund objectives were not always clear, while portfolio performance was not always reported against an appropriate benchmark.

Mike Walters, head of investment management regulation at KPMG UK, said: “Today’s report is not just another review, it’s a fundamental challenge to the value for money that the active fund management industry provides to UK savers and investors.

"Firms need to think carefully about how to communicate to investors what value they add. I expect to see some consolidation of firms and funds as governance committees, intermediaries and investors increasingly question the level of fees relative to fund performance.

"But we mustn’t lose sight of the fact that whilst the FCA found that on average the performance of actively managed funds does not represent value for money, many out-perform and some provide access to certain markets passive funds just can’t."

David Morrey, partner at Grant Thornton UK LLP, said: "One significant area of concern, however, is likely to be how some of these measures will go beyond the rules of other jurisdictions. If funds from those jurisdictions are being made available in the UK will domestic managers be at a disadvantage?

"Also of interest, some of the enhanced fund disclosure proposals are really only plausible in a Brexit scenario, where the UK can take a different path from EU rules such as UCITS.

"To that extent this market study can be seen as the first FCA consultation where the solutions they are discussing are not constrained by the EU regulatory apparatus."