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The FCA’s review of advisers’ ongoing services marks its first significant use of the Duty within the advice sector. By focusing on the heart of this business model, the regulator is demonstrating how it intends to use the Duty to supervise financial advisers.
Six months on from the implementation of the Consumer Duty, the FCA’s updated retail investment supervision strategy is being revealed with each new intervention. First came its sabre-rattling wealth manager Dear CEO letter, with its long list of concerns (some old, some new) and equally long list of Duty-enhanced expectations for firms. Then came its Dear CEO letter on retained interest on cash balances, with investment platforms and SIPP operators needing to respond to the FCA in short order on the action being taken (including a promise to ‘double dip’ no more). Now, we have its latest review on ongoing advisory services.
Twenty of the sector’s largest firms have been asked to complete a survey asking for information on:
- whether they reviewed their ongoing services as part of implementing the Consumer Duty
- whether and what changes they made in response to that review
- whether they delivered ongoing services to clients as promised in the last seven years
- the number of clients whose fees were refunded where the review did not take place.
The FCA has said that it will use the results to determine whether and what further regulatory work in this area is necessary.
Why ongoing services?
The FCA’s focus on financial advisers’ ongoing services should come as no surprise. Over a decade on from the Retail Distribution Review, ongoing advice models dominate the market and generate the majority of advice firm revenue. The design and delivery of ongoing services therefore have a significant impact on the quality of consumer outcomes.
Previous FCA work has also identified potential issues in this area. Its evaluation of the Retail Distribution Review highlighted concerns that some clients might be paying for a service they do not need, as well as finding evidence of price clustering and weak competition. And its last portfolio strategy letter included a cautionary warning to firms that were not “adequately considering the relevance, nature and costs of these services for all their clients”.
It seems clear then that the implementation of the Consumer Duty has given the FCA a stronger basis on which to examine and, if necessary, act on this key part of the retail investment market.
How might this affect me?
It’s important to consider the implications of the regulator’s focus on this area for your own business. The following five questions provide a good starting point.
Do all of my clients need an ongoing service?
The FCA’s evaluation of the Retail Distribution Review found advice firms were placing more than 90% of new customers into ongoing advice arrangements. Its report highlighted concerns that firms might be recommending ongoing services as a ‘default option’, rather than justifying the service based on clients’ circumstances.
The FCA is also aware of the potential conflict of interest that lies beneath the surface of an advisers’ decision to recommend ongoing versus transactional advice. The findings of its recent work on defined benefit pension transfer advice will no doubt have informed this, where the impact of ongoing service revenue on suitability was a key theme. This new review is likely to be looking for evidence of how firms determine whether an ongoing service is the right solution for clients, as well as how they manage the potential for ‘ongoing service bias’.
Are my clients in the right type of service for their needs and objectives?
Past FCA work has highlighted the risks from advice firms ‘shoehorning’ clients into solutions that don’t match their needs and objectives. The frequency and content of firms’ ongoing services are central to getting this right (or wrong).
Most firms serve clients with an array of investment needs and objectives: think, lower-value clients early in their accumulation journey versus higher-value clients taking an income in retirement. The FCA is therefore likely to focus on whether (and how) firms have tailored their ongoing services to meet different client needs, as well as how they triage clients between the available service options, including consideration of alternatives where relevant.
Are my ongoing services fairly priced?
The Consumer Duty’s price and value requirements provide the FCA with an important new tool: the ability to challenge firms on whether ongoing services deliver value for money. This will enable the FCA to look at whether the fees firms are charging stack up against the financial and non-financial benefits clients are likely to get in return.
In the decade since RDR, many firms have adapted their charging models to try and ensure a closer fit between the price clients pay for an ongoing service and the benefits delivered. This has seen firms add features like fixed fees, tiered charges, time-based charging and fee caps to their charging models.
However, there are still firms with charging models that don’t have these features. And while fees based upon a fixed percentage of assets under advice are not inherently bad, they do increase the risk of poor value. This is especially the case where firms serve clients whose wealth levels and needs/objectives vary significantly.
Similar to the FCA’s work in other sectors, firms are likely to be asked to evidence how they have assessed that their ongoing services deliver fair value for all client groups. And if they have groups of clients paying many, many multiples more than others, they’re going to need to justify this approach.
Are my ongoing services delivered as promised?
Ongoing services can only deliver the expected benefits to clients if they take place as promised. The FCA is likely to focus not just on whether services take place, but also whether they take place to the agreed schedule.
Where services aren’t delivered, the regulator will want to know what action firms take in response. This could include whether firms contact clients to rearrange review meetings in a timely manner, how they manage the risk of poor client outcomes from service non-delivery and their approach to refunding fees (where relevant).
Are my ongoing services delivered well?
Finally, it’s important to ensure ongoing services are carried out well. Key areas to consider include whether all of the features of the service are delivered, the suitability of any advice provided, whether necessary disclosures are given to clients, and whether any changes to the underlying investment solution are implemented accurately and on a timely basis.
We can help
Our team of experts has significant insight into the FCA’s approach and we are already helping clients in this area.
We can help you determine how these changes will affect you and assess your Consumer Duty implementation plans to make sure your approach is moving in the right direction.
You can also access our Consumer Duty Resource Library to help you navigate and meet the FCA’s requirements.
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