Financial Conduct Authority  

FCA warns of suitability risks in advice firms looking to sell

FCA warns of suitability risks in advice firms looking to sell

The Financial Conduct Authority has warned the growing trend of consolidation in the market is incentivising advisers to recommend products with ongoing fees, when they might not be suitable, in a bid to boost revenue streams. 

The flurry of activity in the mergers and acquisition market in recent years is one introducers and industry commentators have predicted is only set to continue against a backdrop of retiring principals and growing regulatory costs. 

But in its 86-page Sector View, published today (February 18) the financial regulator warned this pattern could be influencing the retirement products recommended by advisers. 

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The FCA said: "We have concerns that advisers may be recommending products with an ongoing advice requirement, potentially instead of more suitable options that do not have ongoing fees.

"This may be exacerbated by the consolidation of adviser firms, which has been a trend in the past few years.

"Consolidator valuations of advice firms are based on recurring revenue streams, which incentivises IFAs to recommend ongoing advice if they are planning to sell their business in the near future."

The watchdog warned there was a "clear trend" for advised consumers to choose drawdown more often than annuities, compared with non-advised consumers. 

Particularly in retirement these ongoing charging models for advice could lead to unsuitable choices, the FCA said. 

Last week FTAdviser reported the FCA had begun probing advisers on their retirement income advice by sending a number of information requests to randomly selected firms.

A main focus of this crackdown is expected to be poorly managed conflicts of interest, including the use of ongoing fees. 

Paul Dyer, head of regulatory risk and assurance at Huntswood and former deputy chief risk officer at the FCA, said the suspicion was poor advice and conduct had been driven by "inappropriate incentivisation at one level or another".

Mr Dyer said: "There has been significant consolidation activity over recent years, from individual wealth advisers to adviser networks, and when assessing embedded value in firms valuers take into account future revenue streams - which can create a conflict of interest.

"Firms should consider the needs of the consumer first, offering fair and transparent fee models that charge only for the time spent giving good advice.

"When making an acquisition, it is important that this is a key focus of due diligence in assessing risk and ensuring that the processes are in place to offer good advice."

As part of its review of the pension sector the regulator also noted restricted adviser networks were continuing to increase their share of the non-workplace market. 

The FCA said: "Some large adviser networks, which have their own products, continue to have a large share of the non-workplace pensions market by sales volume.

"When consumers take advice on retirement income products, these firms have been able to direct advised client assets to their own products."

According to the watchdog traditional pension providers are responding to this challenge by creating their own in-house "at-retirement" advice offerings.