The FCA turns the spotlight on financial advisers
The Dear CEO Letter
In the wake of a number of mis-selling scandals, the Financial Conduct Authority (FCA) has been alerted to the fact that some financial advisers do not meet the standards it expects. Now, all financial advisers are under the spotlight. The FCA’s focus will not only affect those financial advisers that are not up to scratch – the entire market is likely to be affected.
On 21 January 2020 the FCA published a Dear CEO letter that, not unexpectedly, highlights that the FCA will be focussing on financial advisers for the next two years. As financial advisers you should immediately review your business to:
- Ensure your advice and processes are suitable
- Consider your pension advice processes
- Check your financial resources and professional indemnity insurance are adequate
- Check the financial promotions you have approved
- Be certain you have properly implemented the Senior Managers and Certification Regime (SMCR)
Ensure Your Advice and Processes are Suitable
The FCA has highlighted that there is an increasing number of cases where financial advisers’ actions are harming consumers’ financial well-being. Although the focus of the FCA has been (and will be) on pension advice, you should ensure that your advice across the board meets the needs and objectives of the consumer and that any fees and costs are disclosed clearly.
You must have robust advice processes and systems and ensure that you carry out adequate due diligence on the products and services that are recommended (in particular when recommending non-standard, illiquid investments or unregulated collective investment schemes). Further, conflicts of interests need to be dealt with properly. Your relationships with introducers, other advisers and appointed representatives must not contain an inappropriate degree of influence over you and you must have sufficient oversight of their activities.
You must ensure that your processes are properly documented so that you can “show your workings” to sufficiently evidence in an investigation or complaint that any advice was suitable and that your business is managed in a way that minimises the chance of a consumer being harmed.
We can assist you by advising you on your ongoing compliance obligations and in advising on any complaints or FCA investigation that you may face.
Consider your Pension Advice Processes
The FCA has stated that their review will focus on initial and ongoing advice to consumers on taking an income in retirement. Therefore, you should start by reviewing your pension advice and ensure that all the systems highlighted above are sufficiently robust.
Advisers providing defined benefit pension transfer (“DB transfer”) advice should already have reviewed their processes following the British Steel pension mis-selling scandal. However, the FCA has highlighted in its letter that “too much advice is still not of an acceptable standard”. Firms need to heed this warning, and you must ensure your DB transfer advice process:
- starts with the assumption that a pension transfer is not likely to be suitable;
- includes the identification and managing of the risks associated with DB transfers;
- gathers all the relevant information to carry out a proper analysis and to make a suitable recommendation; and
- is based on adequate expertise and resources.
We have experience in advising clients who provide DB transfer advice. One practical step you could take is to have all DB transfer advice (whether the advice is to transfer or not) reviewed by a compliance specialist before the advice is provided to the client.
Check your Financial Resources and Professional Indemnity Insurance are Adequate
We have advised a number of firms on their maintenance of financial resources and professional indemnity insurance (“PII”) requirements in the context of the FCA’s ongoing supervision work assessing firms’ DB transfer advice processes and consumer actions. Being able to hold adequate financial resources and PII has led, in some circumstances, to firms having to leave certain markets.
The FCA has warned against firms holding PII cover containing exclusions, sub-limits or excesses for certain business lines. Many of our clients have found this especially tough following the hardening of the PII market after the British Steel pension scandal. A number of PII policies we have reviewed contain specific DB transfer provisions, which may not meet FCA requirements, and our clients were unable to find any other cover at a reasonable premium.
Firms also need to be able to evidence the steps that senior managers have taken to maintain adequate PII and so we recommend that a review of your PII cover is prioritised.
Check the Financial Promotions you have Approved
The FCA has suggested that financial advisers take action to review what steps were taken in approving financial promotions in the past and, where these were not sufficient, withdraw the approval. Financial advisers should be aware of the banning of the mass marketing of speculative mini-bonds to retail clients from 1 January 2020. The FCA has also requested that they are informed if financial advisers have approved the financial promotions of unauthorised persons in the last 12 months or intend to begin doing so.
Our financial services experts would be happy to assist in advising you on financial promotions.
Be Certain you Have Properly Implemented The Senior Managers and Certification Regime (SMCR)
SMCR was extended to most solo regulated firms on 9 December 2019. Senior managers need to have a clear understanding of their role and staff need to have adequate capabilities to carry out their role. You should have already implemented SMCR, however, with financial advisers being put under the spotlight, we recommend that you satisfy yourself that you have implemented this correctly.
Some firms have struggled with implementing the regime adequately, and specific problem areas have included drafting the Statement of Responsibilities (which needs to be a succinct outline of what a senior manager is responsible for) and identifying staff that need to be certified.
We can assist firms by ensuring that the SMCR process has been implemented properly, and is focussed on embedding the culture and outcomes that the FCA expects.
How We Can Help
Our financial services specialists have experience in advising financial advisers on all the areas of focus raised by the FCA. We can assist with reviewing your business processes to ensure they are robust and properly documented and, where improvements can be made, we will suggest practical, tailored and commercial solutions.
Our Financial Services Regulatory team have vast experience advising on ongoing regulatory compliance including in relation to DB transfer advice, SMCR and professional indemnity insurance requirements. We can therefore give you peace of mind regarding your firm’s compliance. As our Financial Services Regulatory team have experience of both non-contentious and contentious matters, our review of your processes will be focussed on the issues that matter and will assist by ensuring that your business structure, systems and controls are compliant with FCA rules and regulations and will stand up to scrutiny in the event the worst should happen.
If you are facing complaints or are subject to an FCA investigation or enforcement action, we can provide expert support and guidance so that the process is managed and its impact minimised, in both operational and reputational terms. Please get in touch with our financial services specialists, Adam Edwards or Daniel Meyer.
The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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