The FCA has published its latest Dear CEO/Director letter for financial advisers and investment intermediaries. It provides an important reminder on its key areas of focus over the next two years and some useful pointers as to the direction of travel and updates on important initiatives it is working on.
The FCA’s priorities for the next two years are to:
1. Reduce and prevent serious harm – focusing on retirement income advice, ongoing advice services, ensuring the ‘polluter pays,’ and consolidation in the IFA market
2. Monitor and test higher industry standards under the Consumer Duty – firms should be able to evidence they have implemented the Duty and comply on an ongoing basis.
3. Enable more consumers to pursue their financial objectives through the Advice Guidance Boundary Review.
Today we focus on the clarification provided regarding expectations falling under point 1, all of which are likely to have marked impacts on affected entities.
Retirement Income Advice
The FCA found in its thematic review that, whilst some firms displayed good practice in their advice, some were not, leading to potentially poor outcomes. The FCA reminded firms that they should be using the findings of the thematic review to update how they work so that their advice models will likely lead to good outcomes.
The FCA is carrying out further work to explore the scale of the issues and how to tackle any harm. Where harm is identified, it seems inevitable that the FCA will seek redress for those deemed to have been poorly advised. Further commentary will be published in the first quarter of 2025, at which point we should know more on how the FCA will address the issues it has found.
Ongoing Advice
Firms should ensure the service offered is appropriate, provides fair value, and is delivered within the terms of the agreement. The FCA will release a further update on its ongoing advice review later in 2024, outlining its findings and next steps.
Polluter Pays
Whilst we don’t like the pithy nature of this sobriquet, it is hard to argue with the outcomes that the FCA seeks; it wants to ensure that more capital can be recovered from failed firms for Financial Service Compensation Scheme recoveries and equally importantly, that redress payments in themselves do not lead to a firm’s insolvency.
The FCA published its proposals in CP23/24 in December 2023. It’s fair to say that they have led to a lively debate as to how best to meet the aims of the FCA. Though most will agree with the requirement that firms and appointed representatives will be expected to hold adequate financial resources to meet potential redress liabilities, there is not a consensus as to the exact mechanism to achieve this. We responded to the consultation and our thoughts can be found here.
The FCA also reminds firms considering selling their business or client bank that authorisation will not be cancelled if the FCA considers a firm to have not met its expectations when identifying and meeting any potential liabilities. The FCA expects to outline its next steps for its Capital Deduction for Redress consultation paper before the end of 2024.
Consolidation
Given the very active nature of the IFA consolidation market in recent years, it is not entirely surprising that the FCA is also focusing on this area and the potential for harm it sees. It states that “While industry consolidation can provide benefits, various types of harm can occur where this is not done in a prudent manner with effective controls to promote good outcomes.”
The FCA outlines some of its requirements for consolidation including undertaking adequate due diligence of the selling firm or client bank and ensuring adequate financial resources are always held. Where an acquisition is funded by debt, there should be a credible plan to service the debt which should be supported by realistic and stress-tested financial projections. The FCA plans to undertake multi-firm work to review consolidation within the market.
With around a third of all IFAs having advised on defined benefit transfers in the recent past, it is clear that this will be an area that the FCA will consider forms part of the due diligence it wants to see. We wonder to what extent purchasers can identify and quantify possible future redress liabilities at the time of purchase. It appears to be an area that needs some focus and firms may require support.
What We Are Doing to Help
The expectations indicate a clear focus on advice arrangements being good value for money and firms being able to understand and reserve for potential future liabilities.
The outcome of CP23/24 will provide some further clarification for the latter. It will be important for all firms, including those involved in consolidation (purchaser or seller), to be able to identify and estimate potential redress liabilities in their books of business.
We feel that to date, there has been an absence of professional support to help firms quantify their potential redress liabilities and risks – both in the context of CP23/24 and due diligence in firm mergers.
As well as having a team of actuaries and consultants with a wealth of experience, Broadstone has developed Sunrise, a product that enables firms to identify and quantify potential liabilities in an existing book of business or potential book within an acquisition firm. Sunrise allows firms to complete up-to date assessments quickly and efficiently and so can be embedded into a firm’s risk management process.
Broadstone – redress specialists for over 30 years. For more information – visit our Redress Solutions.
To find out more, contact either Phil or Brian.
Phil Smith – [email protected]
Brian Nimmo – [email protected]
