The FCA’s latest Dear CEO letter issued on 21 January 2020 confirms their supervisory strategy for financial advice firms.
Consumers are required to make increasingly complex financial decisions and financial advice firms play a pivotal role in assisting consumers with these decisions. However, the FCA has identified an increasing number of events leading to harm of consumers’ financial well-being. Therefore this latest Dear CEO letter highlights key areas of concern for the FCA and summarises the action it expects financial advice firms to take. Whilst there is nothing especially new within the letter, with much of the content linking back to the FCA’s Business Plan, the tone reinforces the fact that the Regulator’s patience is wearing thin.
The FCA has stated there will be increased focussed on the following four areas in which consumers of financial advice may be harmed in the next two years:
Suitability of advice remains a key focus for the FCA. This should not be a surprise to financial advice firms, however the letter informs firms that the focus will be on retirement income and wealth decumulation.
The letter also reiterates the FCA’s stance on defined benefit (‘DB’) transfer advice, being that firms should start from the assumption that a pension transfer is not likely to be suitable for consumers. This reminder follows the consultation paper issued in July 2019 by the FCA on DB pension transfer advice and the FCA’s communication to approx. 1,700 firms over specific concerns on the volume of consumers being recommended to transfer out of their DB pension schemes.
Pension and investment scams
The letter warns firms participating in scams that it will take assertive action where necessary. Examples of risks presented by scams include: inappropriate introductions; delegating regulating activities to firms without relevant permission or controls and processes in place; distributors having insufficient knowledge of products and services they are advising on; and non-standard investments containing complex and/or high charges.
Consumers not receiving appropriate redress or compensation from FOS awards or failed service
The letter raises the FCA’s concerns that many financial advisors do not have adequate financial resources and/or professional indemnity insurance for the business activities they carry out. The concerns have come about from the FCA’s work on DB transfer advice.
Consumers paying excessive fees or charges for products and services
Whilst not covered in depth in the letter, we expect this to be a focus area for the FCA this year for all firms conducting designated investment business, due to the MiFID II cost and charges rules that came into force in January 2018, and continued focus from the Regulator.
Financial advice firms should now be mindful of the increased supervisory activity in relation to the above areas. Additionally, the letter mentions the ban on the promotion of speculative mini-bonds, SMCR, Brexit. If not already part of your risk, compliance and third line monitoring plans, then the areas referred to in the letter and this article should be included to ensure firms are meeting FCA expectations.
How BDO Can Help
Our Financial Services Advisory team have a diverse and extensive range of experiences in assisting firms with the above, and similar, areas. We have experience in conducting s.166 regulatory Skilled Person reviews, second-line thematic and monitoring reviews and specific advisory and/or assurance reviews. We can also offer on-going compliance support through our retained client service.
If you have any questions or concerns, please do not hesitate to contact Richard Barnwell or Lorraine Bay.