FCA could look ‘further’ at advice firms’ ongoing service

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FCA could look ‘further’ at advice firms’ ongoing service
REUTERS/Toby Melville

The Financial Conduct Authority has said it may undertake “further cross-firm work” beyond its industry-wide consumer duty and intervene to monitor the advice sectors’ ongoing service to clients. 

In a letter sent to chief executives of advice firms on Friday (December 2) and seen by FTAdviser, the City watchdog said it was “concerned” that advisers were not adequately considering the relevance, nature and costs of their services for all their clients and that it would “develop interventions if necessary”.

The regulator said it was concerned customers were not being provided with all the information regarding their investments, which is required under Mifid II and through suitability reports.

We expect the consumer duty will be particularly relevant to ongoing services provided by financial adviser firms. Therese Chambers, FCA

While the implementation of the new consumer duty - set to come into force next July - will be monitored across all regulated firms, the FCA said it may look to explore this at a sector level.

The regulator added: “This may include assessment of whether consumers are paying for ongoing services that do not meet their needs, is not delivered as per the terms of the agreement or is too costly when assessed against the content and quality.”

The letter, signed by the FCA’s director of consumer investments Therese Chambers, told advice firm bosses “many firms” will require “a significant shift in culture and behaviour” ahead of the incoming consumer duty.

Culture, she said, has been a “key root cause of past major conduct failings”. 

“We expect the consumer duty will be particularly relevant to ongoing services provided by financial adviser firms,” said Chambers.

This is a big shot across the bows for advice firms.Mike Barrett, the Lang Cat

The FCA is keen to see a move towards cultures which consistently focus on consumer outcomes and put customers in a position where they can act and make decisions in their interests.

Last month, Emily Shepperd, chief operating officer and executive director of authorisations at the FCA, gave a speech on how the culture of financial services organisations is often depicted in binary terms, “either dull and Jurassic or reckless and scandalous".

She discussed the importance of senior people not imposing an inherited culture that can create barriers to progress, and stated that the FCA expects senior leaders to nurture healthy cultures in the firms they lead. 

However, director at the Lang Cat, Mike Barrett, said the letter’s focus on ongoing service was “a big shot across the bows” for advice firms.

“The FCA's own data shows over 70 per cent of the advice sector’s revenue is from ongoing fees,” he added.

The letter also referenced a “separate communication” to be sent “in the coming months” which will further explain the impact of the new consumer duty on financial adviser and intermediaries firms.

The regulator said this second letter will include some examples of how the consumer duty outcomes will apply to firms in practice.

The FCA’s department head for advisers, wealth and pensions, Nick McGruer, nodded to this yet-to-be-published Dear CEO letter back in October at the Lang Cat Home Game event in Edinburgh.

McGruer also said at the time that the FCA was "increasingly turning" its focus to retirement income strategies following its work on defined benefit pension transfers in recent years.

Plans for retirement income advice

In the letter published on Friday, Chambers reaffirmed this saying retirement income advice “will be a focus for us over the next two years”.

She added: “We will communicate more details of the specific work planned in the coming weeks. We will act to mitigate any risks or concerns we identify as a result.”

Until now, the FCA has focused on advice provided around defined benefit pension transfers. It recently announced a consumer redress scheme designed to cover firms that have provided advice to former British Steel Pension Scheme members.

Firms may consider a regular review of a sample of client files appropriate to check the quality of advice provided. Therese Chambers, FCA

Almost half (46 per cent) of the advice the FCA reviewed in relation to this scheme was unsuitable.

“Where consumers experience unsuitable advice, we see this is often driven by individual behaviours, misconduct, lack of integrity, unmanaged conflicts of interest and weak systems and controls that fail to provide adequate oversight,” the FCA said.

“Firms may consider a regular review of a sample of client files appropriate to check the quality of advice provided and external file reviews can be a useful tool for firms when considering the quality of advice that consumers received.”

Other areas of improvement cited in the FCA’s letter included “robust due diligence”, both on investment suitability and on third-parties operating the investment, phoenixing, and capital requirements to cover claims.

The regulator said it expects firms to assess their risks in totality and hold sufficient financial resources to cover those risks and potential liabilities, “which will often be above the minimum requirements”.

The FCA recently fined a firm £2.4mn for bad pension transfer advice. The firm, according to Companies House records, holds just £600 at the bank after falling into insolvency. 

More than 200 claims totalling over £13mn against the firm have been paid out by the Financial Services Compensation Scheme.

ruby.hinchliffe@ft.com