'Who are these third parties?': Advisers question FCA’s audit proposals

'Who are these third parties?': Advisers question FCA’s audit proposals

Advisers have mixed feelings about the regulator's proposed third-party audits of advice, which have been touted as a potential solution to the hardening of the professional indemnity insurance market and rising compensation levies.

The Financial Conduct Authority said in its consumer investments strategy yesterday (September 15), firms that can demonstrate they have given good advice should be able to get PII at a fair price, despite the market shrinking from 15 to five providers in the past five years.

It said one way to do this could be via a third party audit, where an independent company would assess the quality of advice given and thereby instil confidence in the insurer.

The more liabilities are unmet, the more the Financial Services Compensation Scheme levies on advisers are driven up, the FCA warned. 

As such the proposal could prove a major part in solving a regulatory deadlock that has trapped advisers for years.

But advisers are not so sure about how it would work.

Martin Bamford, head of client education at Informed Choice, told FTAdviser: “Peer review would only be an acceptable solution if it replaces the regulator. To suggest that professional advisers need a peer to mark their homework is offensive.”

Bamford added: “I’m not holding my breath that these proposals will solve anything. We supply so much data to the FCA, especially through their multiple Covid surveys, that they must know how intolerable the current and proposed levies are.”

Advisers fall under the Life Distribution & Investment Intermediation class which the FCA is hoping will see its levy stabilised following a series of measures proposed by the regulator. 

Indeed, from 2025 to 2030 the FCA intends to target a 10 per cent year-on-year reduction for this and the Investment Provision funding class. But this will mean advisers will have to wait another four years before levies come down.

As for PII, FCA data shows costs for firms, which have previously advised on defined benefit pension transfers, have increased from around 1-1.5 per cent to 3-6 per cent of a firm’s income.  ​

On this front, the FCA didn’t commit to a percentage reduction like it did on FSCS levies. Instead, it placed the emphasis on advisers and the quality of their advice.

Mixed feelings

Sam Marriott, director and co-founder at CSE Financial Services, told FTAdviser he had “mixed feelings” towards the FCA announcement yesterday with regards to the third party audit proposal.

“In principle, I think it's a great idea as I, and many colleagues of mine, believe advice in the market has taken a downward turn, and there hasn't been an independent body step up to monitor and correct poor advice.”

But Marriot is unsure whether the FCA’s solution to this is the right one.

“The problem I have with this is, who are these third parties? Do they have the experience in real world advice to be able to say what is good advice and what is poor advice? How would they differentiate the criteria between those who are network appointed representatives and directly authorised?”