• wblogo
  • wblogo
  • wblogo

TCC's regulatory update for the end of October

Regulatory team, TCC, London, 23 October 2017

articleimage

This month, the UK's Financial Conduct Authority has provided more indications of its 'direction of travel' and future aims, pronouncing on the future of investment and asset management regulation, publishing its findings about the pension transfer market and finishing off some guidelines about so-called streamlined advice.

The future of investment and asset management regulation

Megan Butler, the FCA's executive director of supervision (whose remit covers investment, wholesale markets and specialists) recently delivered a speech on the future of investment and asset management regulation. In it she outlined the important part the investment industry plays in supporting the FCA’s so-called 'mission' and the wider economy, and outlined her organisation's "direction of travel."

Asset management plays a key part in business all over the UK, with over three-quarters of households accumulating or receiving pensions that rely on its services, as well as 11 million people investing in products such as stocks-and-shares ISAs (individual savings accounts). In her speech, Ms Butler said that the FCA meant to put the public interest at the heart of its approach.

Concerns in the market

The FCA’s asset management market study exposed various problems in the markets. Most importantly, it uncovered strong evidence of weak price competition everywhere in the industry. Now that it has published its final report (in June) the regulator is in the process of reviewing the responses to its consultative exercise regarding remedies and changes to its rulebook.

The regulator has also referred the investment consultancy sector to the Competition and Markets Authority (CMA), which published an outline of its investigation-to-be. This will try to answering various questions including the following.

  • Are investment consultants encouraged to compete for clients?
  • Do conflicts of interest affect the quality and price of the services that asset managers perform?
  • Do barriers to entry prevent 'challengers' from entering the market and applying competitive pressure to established investment consultants? If so, does this hurt the established consultants' customers?

Alongside this, the FCA is in the process of preparing a second consultative exercise on the subjects of 'transparency,' benchmarking, performance reporting and (potentially) objectives and the concept of all-in fees. The FCA’s main priority in this area is to implement measures that will reduce harm and increase public value.

Sector priorities – the SM&CR and MiFID II

The implementation dates for both MiFID II and the extension of the SMCR are fast approaching.

The FCA sees personal accountability as a building block of financial services industry's success in future, which is why 'governance' was one of its main obsessions in its asset management market study.

The FCA believes that the European Union's second Markets in Financial Instruments Directive, or MiFID II, will allow it to monitor the market more easily than before and will alert it to instances of non-compliance earlier. It will expect firms to produce STORs or suspicious transaction and order reports and to delineate the laws they have to obey regarding the use of legal entity identifiers (LEIs) when trading. The FCA does not expect firms to meet all the requirements of MiFID II on time, but does expect firms to be able to prove to it that they have taken "sufficient steps" towards meeting the new requirements and have plans in place to complete these.

Market priorities

The FCA expects all firms to be able, on request, to prove that their work cultures lead to positive results and encourage integrity in the markets. In her speech, Megan Butler put forward five conduct-related questions that she thought that firms should be asking themselves as part of their compliance efforts:

  • Have you taken proactive steps to explore conduct risks across the business?
  • How do you encourage all areas of the business to take responsibility for managing conduct?
  • What support is in place to enable individuals to improve their activities or wider business conduct?
  • How does the board and executive committee maintain an oversight of conduct?
  • Are there any business activities that hinder work to improve conduct?

The new asset management hub

The FCA knows that there is a great deal of new regulation in the market and that this might acting as a barrier to entry for new firms. Despite this, the regulator is still receiving a high volume of applications for permission to do investment business, approving a total of 204 applications last year. It is aware that many businesses find it hard to understand its rules, which is why it has opened its so-called asset management hub.

With the aim of helping start-ups obtain 'authorisation' to do business and become normal regulated entities, the hub has four main objectives:

  • to make the FCA's expectations about various things clear and to help firms tackle regulations;
  • to provide firms with easy access to information on an online portal;
  • to encourage more beneficial conversations between the FCA and entrants to the market; and
  • to provide start-up firms with thorough and effective support.

The FCA’s work on defined-benefit (DB) pension transfers

The FCA is reviewing firms' activity as regards DB transfers at the moment. Its aim is to assess the advice that firms are giving consumers and to find out whether they are at risk of harm. In recent years, as a result of the UK's new 'pension freedoms' that abolished the necessity for pensioners to buy annuities before the age of 75, many people have transferred assets from DB pensions into personal pensions. As a result, the FCA is trying to find out how well advisory firms have tailored their business models and processes in response and to spot any risks that consumers may be running when they leave DB schemes.

The FCA has, indeed, conducted an investigation already. This found that some firms are not paying enough attention to the results for consumers when they change their business models to suit the 'pension freedoms.'

Over the past two years the FCA has asked 22 firms for detailed information about their DB transfer business. From this information, it reviewed files on customers at 13 firms and visited another 12 firms. The upshot of this is that four firms have stopped giving advice about DB transfers.

Key findings

Some firms advise people to transfer their DB schemes to other schemes without looking at those others, or the underlying investments into which the pensions are to go. They also do so without knowledge of the introducing advisors' investment-related aims - raises the risk of pensions succumbing to scams. The FCA found the following.

  • Quite often, the introducing firm and the specialist firm shared very little information with one another, particularly with regard to clients’ objectives, clients' requirements and clients' personal circumstances, thereby increasing the likelihood of unsuitable advice.
  • Advisors or transfer specialists had been making recommendations without any knowledge of how the proceeds were to be invested. In some instances, they did so on the understanding that the advisor would make his/its recommendation once the transfer was done.
  • At some firms, the transfer analysis was based on default schemes and/or funds rather than the actual receiving scheme. Despite raising concerns earlier this year, the FCA was disappointed to find that some firms had failed to deal with this.
  • DB transfer business has grown significantly, but many firms have skimped on the consequent need to use compliance resources. As a result, they have failed to process cases within the three-month time limit that applies after the offer of each transfer.

Suitability of advice

The FCA was also not convinced that advice was 'suitable' for customers. The regulator reviewed a total of 88 DB transfers with the recommendation to transfer and found 47% of cases to be suitable, with 17% unsuitable and the remainder unclear. In terms of the suitability of the recommended product, the FCA found that 35% were suitable and 24% were unsuitable.

Now that it has published these findings, the FCA says that it expects firms, as before, to ensure that their personal recommendations suit the needs of their clients. It is also pointing out that some firms have processes and procedures that make it very difficult for their compliance departments to gauge the suitability of advice. According to its recent investigation, this includes firms that:

  • fail to acquire information to do with clients’ needs or personal circumstances;
  • do not try to satisfy the needs and objectives of clients when making their recommendations; and
  • do not assess the risks that the client is willing to take adequately.

Future focus

The FCA has recently consulted interested parties about whether it should change its rules and other published 'guidance' to do with advice about pension transfers (CP17/16), with the aim of making its 'expectations' clearer in the light of recent changes in markets. It will continue to assess firms that provide advice about DB transfers and expects firms to keep up-to-date with its 'expectations' and published advice in this area.

Streamlined advice and fact-finds

The FCA has recently provided 'finalised guidance' (FG17/8) on the subject of streamlined advice and the fact-find process as part of its effort to satisfy the recommendations made by the Financial Advice Markets Review (FAMR). These recommendations are centred on reducing the barriers for consumers who want to receive advice and guidance. Two of these recommendations will be tackled by FG17/8, which aims to support firms that offer streamlined advice about a limited range of 'consumer needs' (recommendation 4) and to make the fact-finding process clearer (recommendation 10).

Streamlined advice

The FCA’s guidelines are designed to cover all aspects of streamlined advice, including ‘robo-advice’ and other automated services, along with more traditional face-to-face or telephone-based services. The guidelines state that firms that offer streamlined advice services should:

  • identify their target markets clearly, also pointing out the markets for which the services are not suitable;
  • have a reliable ‘filtering’ process in place to identify clients for whom the service is not suitable;
  • have a reliable monitoring and oversight process in place to ensure that they are providing consumers with good results;
  • divulge everything about the nature of the service to the clients in a clear format that takes their need for information into account; and
  • only collect the information necessary to provide a suitable recommendation.

Fact-find processes and portability

The FCA’s 'finalised guidance' shows that the fact-find process can often be lengthy and can contribute significantly to the cost of advice. The regulator has therefore floated the idea of "fact-find portability" as a remedy.

Although the concept of portable fact-finds is a good one for both advisors and clients, there are significant regulatory risks involved. Every firm can mitigate these risks by performing background checks on the firm that completed the original fact-find or by asking the client to certify that the information is accurate, or to update it as necessary. Alternatively, firms may prefer to look at the main details of their suitability reports during discussions with their clients, e.g. income, assets and liabilities, to verify their accuracy.

It should also be noted that all firms have their own internal standards for fact-finds, which may lead to significant differences. Each firm ought therefore to be satisfied that the fact-find that it is about to receive covers all relevant subjects. The steps needed to mitigate the risks associated with this initiative does mean that any time saved by porting may be relatively small.

The FCA's research on financial lives

The FCA has published the results of its "financial lives survey," its largest investigation of consumers' behaviour yet. The subject is a broad one: the population’s use of financial services and attitudes towards money. Its findings will help it design of the customer protection rules of the future.  

The study focuses on six age ranges, starting with the 18-24s and ending with the over-65s. Its aim is to identify age-related trends in financial capability, the use of products, indebtedness and weakness.

The FCA found that, on average, half of British adults might be financially weak in at least one way. This, not surprisingly, increased to 77% of those aged 85 and over. Other trends to note include the following.

  • Single parents between the ages of 18-35 are three times more likely to use costly loans than the national average.
  • 13% of 25-34 year-olds are in financial difficulty, having missed a payment in three or more, of the last six months.
  • Only 35% of adults aged 45-54 have given a great deal of thought to how they will manage their money in retirement.
  • Adults aged 65 and older are most likely to type in their card details online without first checking if the website is secure.

This research forms part of the FCA’s efforts to help consumers. It plans to publish its overarching strategy on the subject, with it proposes to entitle ‘Approach to Consumers,’ later this year.

Latest Comment and Analysis

Latest News

Award Winners

Most Read

More Stories

Latest Poll