FCA crackdown to remove vertically integrated advantage

FCA crackdown to remove vertically integrated advantage

The Financial Conduct Authority is planning to tighten its rules around adviser charging to prevent vertically-integrated firms from getting an "unfair competitive advantage".

According to a consultation paper published on Friday (2 December), the FCA is proposing to clarify the circumstances under which vertically-integrated firms can cross-subsidise their advice businesses.

Vertically integrated firms are “one-stop shops” which often provide funds and platforms, as well as financial advice.

Article continues after advert

The paper states: “Firms view the existing guidance as unclear, which appears to have reduced the incentives for firms to innovate and invest in new advice models.” 

While the regulator said it didn’t want to prevent firms from taking advantage of economies of scale, it said costs should be shared by the services, rather than being allocated to subsidise just one arm of the business. 

Under current rules introduced in the wake of the Retail Distribution Review in 2012, vertically integrated firms have to ensure the charges for their advice service covers the costs of providing that service.

Rules state that firms are allowed to cross-subsidise if the costs are not “unreasonably” moved to other areas of the value chain in the “long term”.

These rules were intended to prevent vertically integrated businesses from subsidising the costs of advice through their product charges, and therefore giving these one-stop shops an unfair competitive advantage over independent advice firms. 

The Financial Advice Market Review agreed that the basic principles set out by the RDR remain valid.

But the suggested changes from the FCA, laid out in this paper, said there needs to be clarity around the meaning of “long-term”, and proposed a limit of five years on companies cross-subsidising the advice arm with profits from other parts of the firm.