Many changes to the financial industry have been implemented because of the new Consumer Duty regulations that came into force July 2023. In preparation for the new rules, a focus point for the regulator has been the issue of how much pension and investment firms are charging their customers for ongoing advice. This has been at the forefront of the FCA’s agenda since December 2022, when they set out in a letter their intention to undertake some investigative work on the matter. Specifically, they noted concern that advice firms were not fully considering the “relevance, nature and cost of these ongoing services” for their clients.
In a further letter, published in January 2023, the FCA tried to get ahead of the issue by providing some guidance as to how firms should operate under the incoming Consumer Duty regulations. However, in December 2023, 6 months after the regulations came into force, the FCA held a Consumer Duty webinar where they expressed concerns that clients are still being charged for services they were not receiving.
Now, the FCA has written to 20 of the largest advice firms requesting details of their delivery of ongoing services which clients are being charged for after the initial advice has been given. They want to know if any changes have been implemented after the Consumer Duty regulations were introduced and have requested specific data on clients that are due a review of the continuing suitability of their advice, how many clients have received a review and how many clients have received a refund of their fees when a review has not taken place.
This crackdown on fees being charged forms part of the regulator’s commitment to drive higher standards of consumer protection across the industry
The FCA’s reason for collecting this data is to evaluate “what, if any, further regulatory work it may undertake in this area”. Once all the responses to the letter have been collected and assessed, the FCA hopes to provide a further update on the matter. They have also stressed that the firms surveyed have been chosen to achieve a broad scope review of the entire market and not because of any specific concerns relating to those firms.
This crackdown on fees being charged forms part of the regulator’s commitment to drive higher standards of consumer protection across the industry. Consumer Duty regulations demand that firms act in good faith towards consumers, avoiding causes of foreseeable harm while enabling and supporting clients to meet their financial objectives.
The FCA believes that in the past, firms have been overcharging for the management of funds and that these fees are not only unfair, but often miscommunicated or misrepresented to clients. As a result of this, the regulator has put pressure on St James’ Place to review its own charging structure, calling the existing framework vague and unduly expensive. In response, the firm has announced a swathe of changes to its charges for new investment bonds and pensions. This is the biggest overhaul of fee structures in the firm’s history and clearly driven by a desire to abide by the obligations set out in the Consumer Duty rules.
It is not only management fees that are under scrutiny though, with sharp focus being turned to companies that may be wrongly withholding interest payments on clients’ cash assets held. From December 2021 to August 2023, the Bank of England Monetary Policy Committee raised their base interest rate 14 consecutive times, bringing it to 5.25%, its highest level since the financial crash of 2008. As a result, the FCA launched a probe in July of last year to examine whether firms are unjustly withholding interest payments on their customers cash balances.
The probe found that the amount of interest pension and investment firms were earning on client’s cash balances had “increased substantially” during the last couple of years and the FCA has promised to “intervene” if they find that this interest gain is not being passed onto consumers.
Sheldon Mills, the FCA’s executive director for consumers and competition, wrote a letter of warning to the industry highlighting some of the probe’s findings. He explained that the FCA has reviewed 42 self-invested pension and investment platforms, finding that many had retained “some” of the interest earned on client’s cash balances, labelling this both unfair and ill-communicated. He outlined that in June 2023, the firms surveyed had earned a total of £74.3 million in interest revenue from client’s cash.
The FCA had previously cautioned firms that the practice of retaining interest on client’s balances could be a breach of the “fair value” requirement set out in the Consumer Duty rules. Shockingly, almost 75% of the firms examined during this probe were found to have kept around half of any interest earned on client’s cash assets and of those who kept this interest, almost two thirds of those firms were also charging a fee to use their platforms. This process has been named as “double-dipping”, a process that the FCA has been highly critical of and will be intently monitoring to try and abolish.
Importantly, the regulator has also criticised the way in which this interest retention is communicated to clients, claiming that “it is not disclosed in a way that facilitates consumer understanding”. This is clearly another breach of Consumer Duty rules, as customer understanding is one of the outcomes firms must adhere to. Firms are obliged to ensure consumers are equipped to make good decisions with information made available at the appropriate time and they are required to make sure this information is easily understandable.
The FCA set a deadline for the end of February for companies to address their failings, demanding that all of their practices are clearly communicated, balanced and of fair value to their clients. Sheldon Mills has promised that “if they don’t, [the FCA will]intervene”.
