"Financial advice or investment intermediaries play a vital role in helping consumers make complex financial decisions […] However, we know most people don’t access traditional channels of support."
- Lucy Castledine, Director of Consumer Investments at the FCA
The Financial Conduct Authority (FCA) has said financial advice or investment intermediaries play a “vital role in helping consumers make complex financial decisions […] However, we know most people don’t access traditional channels of support.”
“As we look to the future, we expect the sector will continue to evolve. This is likely to be driven by, among other things, ageing consumer & adviser populations, the transfer of wealth, a shift from defined benefit to defined contribution pensions, geopolitical & climate uncertainty, interest rates, industry consolidation, technology advancements, and regulatory requirements,” the industry watchdog continued.
These factors will undoubtedly present new opportunities for firms to grow and serve new markets, but not without challenges and risks which could harm consumers and the market alike. The FCA stated that it wants to work with firms to ensure customers receive “consistently good outcomes from a sector which is sustainable and well placed for the future.”
Therefore, the FCA’s priorities for the next couple of years are to reduce & prevent serious harm (with a focus on retirement income advice, ongoing advice services, ensuring the ‘polluter pays’, and consolidation), monitor & test higher industry standards under the Consumer Duty, and enable more consumers to pursue their financial objectives through the Advice Guidance Boundary Review.
These priorities will be underpinned by increased industry engagement & collaboration, and a forward-looking data-led approach. “We want to engage with you to gain insights into the issues and challenges you see, help shape our future regulatory proposals, and share our expectations,” it said.
In terms of data, the FCA explained that it aims to “maximise the power of data within the sector. We recognise we are in a unique position, with access to data from firms across the sector. This can provide valuable insights to firms and the wider industry, including the sector’s current position, sustainability, and how it is likely to change.
“As part of our engagement, we will proactively seek views on what insights would be most useful to share. This will focus on data that is easily accessible to minimise the burden on firms. We expect to follow by issuing a survey to firms next year to obtain these insights and aim to start retiring the collection of less valuable data,” the regulator added.
Discussing retirement income advice, the FCA stressed that the size of this market is significant and growing; “Decisions for consumers approaching or in retirement have also become more complex with the potential for more risk.” In March 2024, the industry watchdog published findings from its thematic review of retirement income advice, concluding that it’s “unlikely that most firms would comply with the requirements of the Consumer Duty without taking appropriate actions to address our concerns.”
Moving forward, the FCA will be following up on these findings and carrying out further work to explore the scale of any issues identified. Further commentary is set to be published in Q1 2025.
Looking at ongoing advice services, the regulator noted that its analysis found 90% of new customers are placed into arrangements for ongoing advice, with the proportion of advice revenue from ongoing advice rising to 80% in 2023. “We have concerns firms may not be adequately considering the relevance and costs of these services for all customers and that some are being charged for services that aren’t delivered,” it stressed.
The industry watchdog said firms should “ensure the service offered is appropriate for your customers, that it provides fair value, and is delivered within the terms of the agreement. You should also clearly confirm the details of the ongoing service to your customers, its associated charges, and how customers can cancel the services should they wish.”
“You should not charge customers for services that aren’t delivered. Firms must maintain records to ensure appropriate monitoring and demonstrate they are delivering good outcomes,” the FCA warned. It aims to provide a further update on advice services later this year.
Worryingly, the FCA has seen significant liabilities fall to the Financial Services Compensation Scheme (FSCS). The regulator aims to ensure firms that create liabilities are better able to pay them; “We expect you to ensure your firm and any Appointed Representatives (AR) you oversee hold adequate financial resources to meet potential redress liabilities.”
“Actions we may take include the use of past business reviews and deed polls to ensure liabilities to consumers are identified and met. Where firms are unable to meet their liabilities and accountable individuals seek to move to another firm, we will seriously question their fitness and propriety to hold a role that requires FCA approval,” it said.
Over the last two years, there’s been an increase in the acquisition of firms or their assets. While industry consolidation can provide benefits, the regulator believes various types of harm can occur where this isn’t done in a “prudent manner with effective controls to promote good outcomes.”
The FCA expects individuals to notify & gain approval from the regulator to acquire or increase control in a firm, ensure the delivery of good outcomes is central to their culture, undertake adequate due diligence of the selling firm or client bank, consider its supervision review report & guidance, and hold adequate financial resources at all times.
The industry watchdog plans to undertake multi-firm work to review consolidation within the market. Where it receives notifications from individuals or firms to acquire or increase control in regulated firms, the FCA will assess and challenge their suitability. When acquisitions are completed without prior regulatory approval, the FCA may use enforcement powers to object to the transaction or initiate criminal proceedings.
Additional areas of review include, but are not limited to, ensuring effective AR oversight, future disclosure regime for Consumer Composite Investments, and Environmental, Social & Governance (ESG) priorities.
“We expect you to review this letter and consider how it applies to your firm,” the FCA concluded.
