The new FCA supervisory strategy for the financial advice sector
What is the new FCA supervisory strategy?
A recent speech delivered by Nick Hulme, Head of Department of Advisers, Wealth and Pensions in the Consumer Investments at the Financial Conduct Authority (FCA) outlines a significant shift in supervisory strategy. This address was predicated on the idea that the advice industry should embrace change, and was set against the backdrop of, inter alia, raised interest rates, the changing age profile of the industry’s clients, and the shift from defined benefit to defined contribution pensions.
The three core objectives of the FCA supervisory strategy
The strategy is underpinned by three core objectives:
- reducing and preventing serious harm,
- testing, and monitoring under the Consumer Duty, and
- reviewing the boundary between advice and guidance.
Each of these objectives underpin a broader evolution in the FCA’s “overall regulatory mindset”.
This article unpacks the key themes from the FCA's address and sets out what it means for firms and their clients.
Reducing and Preventing Serious Harm
The FCA's commitment to reducing harm is seen in four distinct areas.
Retirement income advice
The first is a thematic review of retirement income advice, in which the regulator identified areas of good practice as well as what it termed ‘even better ifs’. The FCA will be looking to take action where harm is identified and further guidance on best practice can be expected in the first half of 2025.
Ongoing advice
The second area of focus is ongoing advice. The FCA raised concerns that some firms may not be considering the costs of these services and that some clients are not receiving the services that they are paying for. While the FCA was not able, at this stage, to divulge the ways in which it would address the harm identified, the regulator’s approach appears to be to ensure that clients are not just placed into arrangements but receive value from them.
Capital deduction for redress: Polluter Pays
The FCA's 'Polluter Pays' initiative attempts to address concerns among some firms (who consider that their behaviour in this regard meets the required standard) that they are footing the bill for the failings of other firms because of the significant liabilities which fall to the general industry levy each year. Recognising these concerns, this initiative aims to ensure that the particular firms contributing to these liabilities are held accountable for these failings. If successful, this would reduce the burden on the Financial Services Compensation Scheme (FSCS). A Policy Statement detailing the FCA’s capital deduction for redress proposals is expected to follow by the end of the year and, if implemented, this initiative would further incentivise firms to ensure that they are adopting best practice.
Consolidation
Consolidation is the final area of focus within the FCA’s serious harm reduction and prevention strategy. This comes in response to the trend towards larger entities acquiring smaller firms and their assets. The FCA took this opportunity to characterise itself as agnostic to consolidation, but concerned about the harm this trend may cause if not underpinned by the correct controls and governance. The FCA reiterated that it expects to be notified of changes in the control of authorised firms and signalled its readiness to act if such transactions go unnotified. The regulator also expects that firms carry out robust due diligence in service of good client outcomes as a result of the relevant transactions. The examples provided included ensuring clear and well-evidenced board level ownership in terms of assessing the impact on clients of the proposed change in control.
Testing and Monitoring under the Consumer Duty
This speech reflects the fact that the Consumer Duty’s four outcomes:
- price and value,
- consumer understanding,
- support, and
- products and services – are central to the FCA's supervisory strategy.
To this end, the regulator characterised its role in the financial advice industry as one of 'nurture and challenge.' This encompasses sharing best practices and providing support while also holding firms to account when customers receive poor outcomes. That said, smaller firms received reassurance that ‘nurture’ – in their case – means pragmatism and proportionality in terms of the regulator’s expectations.
The speech provides firms with up-to-date guidance as to best practice, which is to test themselves through the thinking behind their annual reporting on the Duty. Firms were invited to view completing this report as an opportunity to evaluate their processes, be self-critical, and enact necessary changes.
Advice Guidance Boundary Review (AGBR)
The AGBR aims to clarify the line between advice and guidance, providing firms with the confidence to support their clients with appropriate guidance, but without inadvertently crossing into giving regulated advice. The FCA referred to its earlier Financial Lives survey, which revealed that only 8% of participants were in receipt of financial advice. This was put to the industry as an opportunity to help currently unsupported clients but recognising the continuing need for more substantial regulated advice in certain cases.
The forthcoming review, which is a joint effort with the Treasury, covers three limbs. The review aims to clarify the boundary between advice and guidance and to enable targeted support for clients that is ‘better, not best’ and tailored to the emerging ‘middle ground’ identified in the market. The joint review will also help the industry towards delivering simplified advice, which is designed to meet the one-off needs of mass market clients, focusing on particular life events or specific client needs. Firms were urged to be proactive in their engagement with the motives behind the review and to take steps to reduce the advice gap.
Conclusion
The FCA's strategy is a call to arms for the industry to embrace innovation, take calculated risks, and engage in open dialogue with the regulator. The FCA has committed to increased interaction with the industry to ensure that the FCA’s strategy for the sector reflects the needs of clients and firms alike.
For more information on how these changes may affect your firm and the services you provide, please contact Richard Ellis or William Garner.
