Dear CEO/Director | Release Date: 5th December 2022
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) issued a comprehensive strategy letter to Financial Advisers and Intermediaries following up on the initial strategy outlined in January 2020. This document provides an updated assessment of prevailing risks in the sector, outlines the FCA’s expectations, and summarises planned regulatory activities.
Implementation of Consumer Duty
The letter highlights the introduction of the new Consumer Duty Policy Statement (PS22/9) and Finalised Guidance (FG22/5) released on July 27, 2022. These regulations set forth enhanced consumer protection standards across financial services, mandating firms to ensure the delivery of favourable outcomes for retail customers. The FCA plans further communications to detail the application of these rules specifically for Financial Adviser and Intermediary firms, along with practical examples.
Importance of Financial Advisers
Financial advisers are crucial in guiding consumers through complex financial decisions that affect long-term financial well-being. These decisions include planning for retirement, achieving financial goals, and adapting to life changes and economic fluctuations like inflation. Advisers provide valuable assistance in identifying consumer needs, recommending tailored financial solutions, and offering ongoing support to ensure those needs and objectives are continuously met.
Objectives for Financial Advisers
The FCA defines several key objectives for the sector:
- Ensuring consumers receive high-quality, appropriate advice.
- Reducing the prevalence of consumers affected by pension and investment scams.
- Decreasing the number of firms that fail to provide necessary redress due to insolvency or strategies to evade liabilities, such as phoenixing.
- Assuring that consumers receive value-for-money services.
These objectives support the broader goals outlined in the FCA’s Consumer Investment Strategy and Business Plan, which include reducing financial scams and setting higher standards across the financial services industry.
Focused Areas of Regulatory Concern
Suitable Advice
Provision of suitable advice remains a primary focus, encompassing all investment advice given to retail consumers, particularly in areas like pension transfers and retirement planning. The FCA criticises the quality of advice in pension transfers, especially highlighted by the mis-advised decisions seen in the British Steel Pension Scheme (BSPS), where nearly half the advice was found unsuitable.
Expectations for Firms:
Firms should understand the root causes of unsuitable advice, such as misconduct or poor oversight, and take steps to mitigate these risks.
Firms are expected to conduct periodic reviews and audits of client files to ensure the quality of advice.
Advisers should consider long-term market conditions and personal circumstances in their recommendations.
FCA Actions:
The FCA will focus on retirement income advice to ensure it meets standards and will take action based on findings from ongoing monitoring.
The authority continues to oversee the pension transfer market, ensuring adherence to suitability standards.
Pension and Investment Scams
The FCA defines scams as deceptive investments with little or no likelihood of returns, often laden with high fees or charges that can deplete consumer savings.
Expectations for Firms:
Firms must conduct thorough due diligence on investments and understand product details before recommendation.
Advisers should avoid conflicts of interest in investment recommendations and be wary of products promoted by third parties with high commissions.
FCA Actions:
The FCA will use intelligence and data analysis to identify and prevent scams, employing swift actions to protect consumers.
Firm Failure and Phoenixing
Firm failures should be managed orderly to mitigate impacts on clients, including ensuring they receive due redress rather than relying on the Financial Services Compensation Scheme (FSCS).
Expectations for Firms:
Firms are expected to maintain adequate financial protections, such as professional indemnity insurance and sufficient capital resources, to cover potential liabilities.
The FCA urges firms to plan adequately for an orderly wind-down.
FCA Actions:
The FCA will review the prudential regime for non-MiFID investment advisers and engage with firms lacking adequate financial resources.
Actions will be taken against firms and individuals attempting phoenix activities, with heightened scrutiny on new applications.
Ongoing Services
The new Consumer Duty impacts how ongoing services should be structured and priced, ensuring they align with the client’s needs and provide fair value.
Expectations for Firms:
Firms should ensure that ongoing services are necessary, correctly priced, and effectively delivered as per agreements.
The culture within firms should emphasise consumer outcomes and comply with the higher standards set by the new Consumer Duty.
FCA Actions:
The FCA will monitor and potentially intervene if ongoing services do not meet the new standards, assessing whether they provide adequate value and meet consumer needs.
Additional Regulatory Focus Areas
Diversity and Inclusion
The FCA calls for greater efforts to foster diversity and inclusion within firms, aligning with broader societal expectations and enhancing service quality across diverse consumer bases.
Sustainability
The letter acknowledges the critical role of financial services in supporting environmental, social, and governance (ESG) goals. The FCA encourages advisers to consider sustainability in their recommendations and product offerings.
Conclusion and Next Steps
CEOs are reminded of their responsibilities to align with FCA requirements and are encouraged to engage proactively with the regulations to avoid future compliance issues. The letter emphasises the use of the Senior Managers and Certification Regime (SM&CR) to ensure accountability and address areas of concern directly.
Key Takeaways and Actions:
Firms should rigorously assess their compliance with new regulations and adapt their operations to meet enhanced consumer protection standards.
Proactive measures should be taken to ensure the suitability of advice, the adequacy of financial resources, and the effectiveness of ongoing services.
Engagement with FCA communications and forthcoming guidelines on Consumer Duty is crucial for staying ahead of regulatory expectations.
This extensive overview provides a clear pathway for Financial Advisers and Intermediaries to align their practices with FCA expectations, ensuring better outcomes for consumers and maintaining the integrity of the financial advisory sector.