The FCA have announced a review of suitability, this time with a focus on the advice that clients receive in connection with their retirement planning, particularly at the point of retirement.
They have indicated that the review will involve a representative sample of businesses in order to understand how the retirement income advice market is currently working. Before the end of the year there will be a report setting out the results of the review.
As if this wasn’t enough to look forward to, the FCA have said that they will continue to work on defined benefit pension transfer advice, pension and investment scams, and whether or not firms hold adequate financial resources and professional indemnity insurance. And we have the senior managers and certification regime to ‘embed’ – with certificates to be issued in time for 9th December. It’s going to be a busy year – and firms still have to be successful commercially to pay increasing levies and PII premiums. And don’t get me started on the likely outcome of trusting politicians to negotiate trade deals!
We cannot stop all scams, but we can help people to understand financial products and services better than they currently do.
There is a widespread acknowledgement that the way in which the retirement market is evolving, following the pension freedom reforms, has created more heat than light. Financial advisers should be at the centre of the discussion and work to enable clients to understand their options and make informed decisions. Just because I can take my pension pot and buy a Lamborghini doesn’t mean it’s the right thing to do.
In January Debbie Gupta, Director of Life Insurance & Financial Advice Supervision, sent a four page letter to financial advisers which acknowledged the central role they have to play as members of the public are having to take more responsibility for an increasing number of complex financial decisions. The FCA’s concern is that there are still firms which, rather than helping their clients navigate these choices and arrange the right solutions for their needs and objectives, are acting in ways which result in significant harm to the financial well-being of their clients.
The letter goes on to identify four key ways in which consumers of financial advice may be harmed:
▪ receiving unsuitable advice for their needs and objectives;
▪ falling victim to pension and investment scams;
▪ not receiving redress as a result of the non-payment of FOS awards and/or failing firms being unable to compensate consumers;
▪ paying excessive fees or charges for products and services.
Let’s have a look at each of these and consider the role of T&C. In almost every speech given by representatives of the FCA the word culture gets a mention and as you look at the fines being levied, not just by the FCA but in many sectors of the economy, there is clearly a thread running through these punishments: the businesses involved should have known better.
I am fascinated that in creating the SM&CR the FCA decided it needed to impose conduct rules. The first is a requirement to act with integrity. When I tell people this, they’re often amazed; ‘why does this need to be a rule, surely firms who want to grow realise that a firm acting with integrity is more likely to retain clients and get referrals than one which doesn’t’.
Each piece of financial advice should be suitable – the fact that it isn’t always the case should be of concern to all of us. Advisers with integrity want to give good advice, they will ask probing questions to get to the core of a client’s situation and objectives and then create solutions that best address those needs. You can’t train integrity, but you can help advisers understand what it looks like.
We cannot stop all scams, but we can help people to understand financial products and services better than they currently do. The PFS is actively encouraging its members to get involved in schools so that youngsters entering further education or the world of work have a better understanding of finance. With increased awareness, fewer people should fall for alluring promises of high returns which we know are not realistic. The message of five a day has changed the diets of many people; could ‘if it looks too good to be true it is almost definitely fake news’ have the same impact on their financial well being.
The next point was around firms being able to pay compensation. Providing good advice in the first place means that many firms get few complaints – yet they’re the ones that are hit with FSCS levies as other firms shut down rather than face the consequences of the poor advice they have provided. We all make mistakes and no doubt some advice though well-intentioned turns out to be poor. Training staff to ask questions and carry out thorough due diligence will go some of the way to reducing the risk of complaints. The FCA are also looking for firms to consider their capital and non-financial resources to check their resilience. One good question to consider is: how many times you could pay the excess on your PII policy before it hurt the business. Alongside building the capacity of the team to get things right, there should also be a fund being built to protect the business.
The final harm relates topayment of excessive fees. My sense is that over the coming years advisers will need to develop a greater understanding of the value for money that they provide. T&C has a part to play in helping advisers articulate to clients what they are paying and more importantly why. Advisers need to have the skills to deliver on the promises clients expect in return for adviser charges.
Under the one of the ‘Action to take’ headings in her letter we read that firms need to ensure that the advice provided is suitable, costs and charges are disclosed clearly, and that advisers act in the best interests of their clients. Conflicts of interest must be identified and where they cannot be prevented, disclosed and managed.
It will be interesting to see how firms fare in suitability review 2. However, I wouldn’t wait until the report to consider what needs to change. Have another look at Debbie Gupta’s letter and ask how you as a T&C professional can influence change in your organisation.