Dear CEO/Director | Release Date: 21st January 2020
To read a shorter summary of this Dear CEO/Director letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued this detailed letter as part of its strategy to supervise financial advisers throughout the UK. This document outlines the FCA’s approach, identifies key areas of concern, and provides guidance on the actions financial advisers should take to align with regulatory expectations and enhance consumer protection.
Importance of Financial Advisers in Consumer Financial Wellbeing
Financial advisers play a crucial role in assisting consumers with complex financial decisions. As consumers are increasingly tasked with managing their financial choices, the guidance provided by financial advisers is essential for ensuring these decisions are sound and beneficial. However, the FCA has identified several cases where the actions of financial advisers have led to significant harm to consumers’ financial wellbeing. Addressing these issues is therefore a priority to maintain the integrity and trust in the financial advising sector.
Key Risks and Areas of Concern
The FCA has pinpointed four primary risks where consumers face potential harm from financial advice:
- Unsuitable Advice: Consumers receiving advice that does not align with their financial needs and objectives.
- Pension and Investment Scams: Consumers falling victim to increasingly sophisticated scams.
- Non-payment of Redress: Consumers not receiving compensation due to advisers’ inability to pay FOS awards or because of insolvent firms.
- Excessive Fees or Charges: Consumers paying more than necessary for advice and financial products.
These issues form the central focus for the FCA’s supervisory activities over the next two years.
Supervisory Priorities and Expected Actions
Assessing Suitability of Advice and Disclosure
Following the 2017 Assessing Suitability Review, the FCA will conduct further work on the suitability of advice and associated disclosure (known as ‘Assessing Suitability Review 2’). This review will focus on initial and ongoing advice to consumers on taking an income in retirement, a market that has evolved significantly following pension freedom reforms.
Expected Actions:
- Ensure that advice is suitable, costs and charges are clearly disclosed, and actions are in the best interests of clients.
- Identify conflicts of interest and manage or disclose them as necessary.
Defined Benefit Pension Transfer Advice
Despite ongoing regulatory efforts, much pension transfer advice is still below acceptable standards. The FCA continues to be concerned that advisers often recommend consumers transfer out of defined benefit pension schemes, which generally is unsuitable for most clients.
Expected Actions:
- Approach pension transfers with the assumption that they are unsuitable.
- Manage risks associated with defined benefit transfer business, including conflicts of interest related to charging structures.
- Ensure comprehensive information gathering for appropriate pension transfer analysis and suitable recommendations.
Pensions and Investment Scams
Scammers pose a significant threat to consumer financial safety, employing increasingly sophisticated strategies to outwit due diligence processes.
Expected Actions:
- Maintain vigilance against scams and ensure robust advice processes.
- Report suspicious activities to help prevent scams.
Financial Resources and Professional Indemnity Insurance
Concerns have been raised about some financial advisers holding inadequate financial resources or professional indemnity insurance (PII), affecting their ability to compensate harmed clients.
Expected Actions:
- Maintain sufficient financial resources and compliant PII.
- Ensure continuous and comprehensive PII coverage.
Promotion of Speculative Mini-Bonds
Following the ban on the promotion of speculative mini-bonds to retail consumers, financial advisers need to reassess their promotional activities.
Expected Actions:
- Review and ensure all financial promotions comply with regulatory standards.
- Withdraw approval from non-compliant financial promotions.
Conclusion and Next Steps
Financial advisers are encouraged to review this letter with their boards and take necessary actions to address the outlined concerns. The FCA expects firms to enhance their practices, ensuring they operate within the regulatory framework designed to protect consumers and maintain financial system integrity.
Key Takeaways:
- Prioritise the suitability of advice and the interests of clients.
- Enhance vigilance against financial scams and ensure robust compliance processes.
- Ensure adequacy of financial resources and professional indemnity insurance.
- Adhere strictly to new regulations and FCA guidance, particularly regarding pension transfers and speculative products.
This strategy emphasises the FCA’s commitment to ensuring that financial advisers uphold the highest standards of conduct and consumer protection.