FCA adviser strategy announces review of consolidators and data-led supervision

9 October 2024 | UK & Europe | Articles

The FCA has published its portfolio strategy for financial advisers and investment intermediaries for the next two years. The letter announces two important new initiatives: a thematic review of firms involved in acquisition and consolidation activity, and the introduction of new data requests to drive data-led supervision of high-risk and outlier firms. Both pieces of work are likely to bring an array of new firms and business models within proactive FCA supervision at a time when the Consumer Duty has raised standards. So it’s important for impacted businesses to make sure they’re ready for the additional regulatory scrutiny that lies ahead.

The strategy’s wider work programme reflects FCA projects that are in train, so there should be no big surprises. Its proactive supervision of the Consumer Duty, thematic review of ongoing advice services, and follow-up work on its review of retirement income advice are all areas where the FCA has already told firms to ensure they are meeting regulatory expectations. Any businesses that have yet to review their approaches in these key areas should prioritise work to close any gaps.

Sector priorities

The FCA’s supervision of the sector will be driven by three core priorities:

• Preventing serious harm in key areas: focused on retirement income advice, ongoing advice services, the impact of consolidation activity, and having adequate financial resources to meet redress liabilities (‘polluter pays’).
• Supervising the Consumer Duty: focused on whether firms have amended their business models and conduct in line with the Duty’s higher standards.
• Using the Advice Guidance Boundary Review to increase access to advice and guidance: focused on interventions which enable firms to develop solutions supporting consumers with complex financial decisions.

Summaries of the key elements of the FCA’s work programme are set out below.

Ongoing advice services

Supervision work on the delivery of financial advisers’ ongoing services has been ongoing since the start of the 2024. The FCA has said it will provide an update on findings and next steps later this year. This suggests the upcoming publication is likely to be a significant event with meaningful consequences for the sector.

In the meantime, the letter confirms the FCA’s expectations for how businesses should approach the design and delivery of their ongoing services:

• Services need to be appropriate for clients’ circumstances: This means considering whether clients need an ongoing service and, where they do, making sure the content of the service is matched to client needs (so in the ‘goldilocks zone’ of not too little, not too much).
• Services need to provide fair value: This means ensuring there’s a good fit between the features/benefits of the ongoing service and the price clients pay, including whether this varies for different client groups (e.g. higher/lower value clients or clients with complex/non-complex needs)
• Services should be communicated clearly to clients: This means ensuring that the details of the service, the associated charges and the ability to cancel the service have been provided to clients in a format they can understand.
• Services need to be delivered within the terms of the agreement: This means checking whether the specific service features set out within client agreements are delivered. Robust record-keeping and monitoring are needed to demonstrate this.
• Clients should not be charged for services that are not delivered: This means ensuring there are processes and controls to link ongoing adviser charges to service delivery, and taking action where issues are identified.

While the content of these expected standards should not be a surprise, their inclusion within the portfolio strategy letter constitutes a further line in the sand that businesses will now need to deal with. This is likely to have a significant impact on businesses who cannot verify and evidence the delivery of service components and don’t have processes in place to amend their charges in response.

The impact on adviser charging revenue could also require some businesses to revisit aspects of their distribution model, such as needing to refine their target market or redesign aspects of their service proposition. Any subsequent activity to move clients between services, or cease providing services to clients, will need to be managed carefully and take account of the impact of the Consumer Duty.

Firms involved in consolidation / acquisition activity

The benefits and risks of firm acquisition and consolidation activity have been on the FCA’s radar for a while. Significant growth in consolidation activity – in terms of both firm and asset purchases – has been a key sectoral trend in recent years, influenced by private equity investment and the impact of regulation (most recently in response to the Consumer Duty).

The decision to undertake a thematic review on consolidation at this point in time could be indicative of increasing FCA concerns. This may have been prompted by issues found within existing supervisory cases or in response to the recent flurry of Duty-related acquisition and asset-purchase activity. Whatever the reason, the FCA is sure to be eyeing the opportunity to look at this topic through the more exacting lens of the Consumer Duty. However, some will say that the timing of the review is too late, given the volume of consolidation activity that has taken place already.

Ahead of the review, the regulator reminds in-scope businesses of the need to:

• get relevant regulatory approvals for the underlying activities
• undertake robust due diligence on selling firms and their client banks
• ensure they hold adequate financial resources, including complying with prudential consolidation rules where relevant
• ensure their associated strategy, governance, oversight, and controls focus on the need to manage risks and deliver good client outcomes.

More data-led supervision of high-risk and outlier firms

The FCA plans to send more probing data requests to businesses starting in 2025. The purpose of the data requests is twofold:

• Better sectoral insights: The regulator plans to use the aggregate data to inform its own work, but also suggests that it will also look to provide valuable insights to businesses and the wider industry, such as benchmarking.
• Identification of risky firms: The regulator will use the additional data to identify potential high risk and outlier firms within the large (circa 6k) firm population. It is likely to mimic the approach taken in other sectors, such as wealth managers and stockbrokers, where the data is used to identify a sub-set of firms that are then subject to proactive supervision focused on key areas (such as the Consumer Duty or other portfolio priorities set out within the strategy letter).

Other FCA initiatives

The portfolio strategy letter also references the following additional FCA work:

• Financial resources for redress liabilities: Making sure the ‘polluter pays’ remains an ongoing FCA priority. The letter reiterates the need for businesses to hold adequate financial resources to meet potential redress liabilities and confirms that the regulator’s assessment of requests to cancel authorisation will also include this focus. The FCA will set out next steps on its Capital Deduction for Redress consultation before the end of the year.
• Retirement income advice: The FCA has been undertaking follow-up supervision work linked to its thematic review publication and is carrying out further work to assess the scale of the issues identified. So any firms that have yet to review their approach in light of the Dear CEO letter should prioritise work to close this gap. The regulator plans to publish further commentary on the retirement income advice market in ‘Q1 2025’.
• Advice Guidance Boundary Review: The FCA wants firms to engage with the reforms and consider the opportunities to support a wider range of clients.
• Consumer Duty: The FCA will use its supervision activities to continue to monitor and test how businesses have implemented and embedded the Consumer Duty.
• Increased industry engagement and collaboration: The FCA is keen to increase its sectoral engagement to improve its understanding of the issues and challenges firms face. This will include attending more in-person events and delivering more speeches.

Steps you should take

If you’re a financial adviser, we recommend you undertake the following three steps:

• Review your approach to ongoing advice services: Undertake a gap analysis between your service proposition and the FCA’s updated expectations. If this identifies any significant issues, consider whether you need to carry out further work to update your approach and/or assess the potential impact on clients.
• Document the action you have taken in response to the FCA’s retirement income advice Dear CEO letter: Make sure you have assessed whether your approach to retirement income advice meets regulatory requirements and documented any action(s) taken in response.
• Review your management information ahead of the FCA’s data request: Assess whether you have the management information needed to demonstrate effective oversight of the business. This should include your ability to demonstrate good outcomes under the Consumer Duty, especially in the areas highlighted within the portfolio strategy letter.

What can Bovill Newgate do to help you meet these regulatory requirements?

Our team of experts has significant insight into the FCA’s approach to these topics and we have already supported a number of clients in these areas.

We can determine how the review findings affect your business and ensure your processes are in line with the regulator’s suitability and Consumer Duty requirements.