It's here, the eagerly awaited business plan from the FCA.....I know that you've all be on the edge of seat too!

Well here it is (and my take on it)

Hopefully I don’t need to remind anyone out there what the FCA is and what it is charged with doing? (Phew) And more importantly why you need to know this stuff? Now prepare yourself as this is quite a lengthy article but it's important that we all read it (and not just because I had to and write this article!)

So their annual business plan is an indication of how the world of retail financial advice is ticking along. Not only does it show the advisory community what the FCA has been up to and plans to do the coming year but more importantly to my mind it shows us any areas that our industry is potentially struggling with or areas where something may have gone awry and the FCA’s business plan is an indicator of where we may need to focus some of our attention in the coming 12 months.

Allow me to summarise some of the key points that I feel will matter most to the IFA and mortgage broking community if you will…..but I warn you, as it’s the FCA’s business plan this isn't going to be a brief article and nor will it raise many chuckles I am afraid, in fact I can guarantee that some of you will feel “ruffled feathers” from some of the things I say here (and this is my personal opinion may I remind you) If I omit a point then please don't stress too much (after all I am only human!) and where I use red this is not me telling you that you "need to show your workings" or cite a bibliography but rather a way to show you what I think something means to IFAC clients.

Chairman’s Statement

All I gathered really from his statement was that we are facing “change” and that they have introduced something at the FCA called “Reg Tech” (essentially adopting technology to assist in regulation – surely something rather obvious I my mind seeing as the whole industry has tech embedded to its core already!)

Chief Executive’s Statement

Lots of mention of BREXIT and how it may affect their operation (but no actual details)

There is the reminder that LIBOR is to cease in 2021 and be replaced by the “Risk Free Rate” and that the FCA will continue to see how the adoption of MiFID II progresses.

Then there is some very relevant stuff relating to protecting customers, especially the vulnerable (this is stuff that I personally see immense value in) and the Chief Exec talks about what the FCA no doubt sees as a threat to consumer safety (they have used the word “Threat” plenty recently) high charges are mentioned and there is direct reference to accessing DC pensions through “Pensions Freedoms” and the risk to customers. PPI is of course mentioned (and we expected that it would be) and that the FCA now regulates claims management firms, they also suggest that there is a pleasing increase in the number of PPI claims being brought by the individual now.

After a section that reminds us all what they do (much longer than my description above) they show their “Mission Statement” (there had to be one as these are still rather fashionable in the UK) but for once I don’t mind a good old Mission Statement as this one is rather good I feel, they state that have a 3 tier reporting framework to show their performance and it is the following areas: 

1. Operational Efficiency Internally (nice to know but not that relevant to most)
2. Impact of their interventions (now this one I like as it should tell us whether they have been able to reduce harm to the industry and consumers, so are they doing a good job?)
3. Outcomes in sectors they regulate (have they achieved success in the various sectors they police? But we need to wait for the annual report to see the real meat on these particular bones) 

The FCA’s priorities for the coming year (Here I will indicate if I feel this is important to you in red!)

EU Withdrawal and International Engagement – To ensure a smooth transition where relevant (for most of you this is likely to be a minor impact unless you advise offshore or in the EU)

Culture and Governance – Looking at remuneration (pay to you and me) and whether how they reward staff encourages potential harm to customers (indemnity commission anyone!) Plus the extension of the Senior Managers and Certification regime to all authorised firms. These are key areas for you to look at, reviewing how you pay staff and whether there is any risk that this might encourage any potential for staff to act in ways that could harm customers. And if things do go wrong, holding the individuals in the firm directly accountable.

Operational Resilience – Helping firms manage reductions in their ability to deliver services. This is a key one for you potentially as it includes third party service providers, such as provider portals etc. and 17% of all disruptions to service in the UK financial services market, was due, according to the FCA to third party technology failures. This also included data transfer to new systems (think of all the providers that “migrate” your clients to their new IT systems every year) They also employ a technique known as “Ethical Hacking” and before you panic, it’s perfectly legal according to the FCA and it is designed to test the integrity of firms and their resilience to cyber-attacks. This is important for you all as the criminal fraternity see you, the smaller firm, as their prime targets for attack

Financial Crime and Fraud – To improve the anti-money laundering capabilities and raise awareness to scams. This continues to be a major issue for the UK retail financial services industry and is one of my favourite subjects (as I find it rather fascinating how people try to get round regulations and get at our money – but just to be clear I detest financial criminals) as we are seen by criminals as a relatively easy way into people’s money. While this is true and we must ensure that people can access solutions and products relatively easily, we must continue to take suitable measures to prevent, deter and detect potential financial crime. The FCA will be monitoring all firms to see that there is a raising of the standards of protection in this area. One point that I would make here relates to those of you that regularly use adverts and promotions (I did write something recently on promotions) continue to get IFAC to scrutinise and review them for you, in this way you can make your best efforts never to be suspected of any scams…..and your adverts will be compliant and accurate!

Fair Treatment of Existing Customers – Seeking to ensure that existing customers are not mis-treated by our industry in favour of new customers. Here is one that often falls to the Mortgage Market for a section of finger-pointing. After all how often do we see a way better offer than we have with our bank or lender and with the caveat “New Customers Only”…..frustrating to say the least. Here the FCA says something very relevant in that they continually see existing customers “penalised for their loyalty” and this is a rather astute description of what goes on still in 2019. If you join as a new customer somewhere you often get a deal or rate that an existing customer cannot (my mobile phone provider for example grrrrrr!) As an IFA or Mortgage adviser, you have often little influence over what a provider will make available to your clients where products are concerned BUT it is the realm of on-going advice and support where I feel you can really demonstrate that you do not penalise your existing customers for their loyalty. Make sure that your annual reviews are good ones and worth the ongoing adviser fees you get, demonstrate that a customer that has been with you ten years gets the same level of your service as a brand new one. This is not hard to do in my opinion

Data – To develop a strategic approach to data – Now this one I struggled with as the Key Priorities were really vague, so I went to the detail below and identified the following that I feel is relevant to you……If you do use or plan to use automatic systems (so called Advice Bots and automated decision making systems) then you should ensure that they are easy to understand, transparent and bias-free! The FCA will continue to explore the use of “RegTech” allowing electronic interaction with them (but you won’t get out of your supervised visits and annual audits before you cheer!!) What I also took from this was the essential need to maintain data security. Never mind GDPR and its additional burdens on us all, here I am talking about the integrity of the data that you use and how you transmit it. If you don’t use encryption when you send data then you are wide open to cyber crime and in breach of all manner of Data Protection regulations! But more than this, you should if you don’t already, use BAT for all your client documents! Upload everything for a client and do away with the need to store data twice or three times and also, crucially, when IFAC need to see something there is no need to send us stuff, as we already have access to it!

Demographic Change – Identifying how regulation must change to cater for the changes in consumer demographics. Here is in my mind, an important one for you. Having been the driving force behind a review of vulnerable client sales some years ago with a major bank (sales managers and advisers hated me and frankly I loved it!) I saw just what risks were inherent in advising certain demographics, if you’ll forgive me here, vulnerable clients still attract vultures and they prey on them in order to make money, there is no other way to put it! However, with the increase in later life financial planning and the real needs of a great many people for financial solutions to help them live in later life, there is an increasing demand upon advisers to be able to offer advice and solutions specifically aimed at them (Think Lifetime Mortgage for example) We have rules for “Vulnerable” clients and “Power of Attorney” clients and there should be no barrier to any adviser providing advice and solutions to such clients. If you haven’t done the training for these groups and you intend to advise them then make sure that you do the training and evidence it! IFAC stands ready…..but there is an ever increasing demand for quality advice in this demographic and the FCA intend to police it with you.

Asset Management – The overriding aim here seems to be Value and how to address the perceived poor value of investment products. Now for most of the IFA and Mortgage adviser community this doesn’t really affect them, however there are a few of you out there that may be tied to one SIPP or Platform and I feel that you need to take heed of this particular objective of the FCA this year. If you are tied to one fund/SIPP/Platform and so place all your investment business with that one solution you must be able to demonstrate that any solutions can meet your client’s needs. If every client somehow needs “active management” or has a “very high capacity” to tolerate a financial loss and you only use one plan/fund/solution, then I expect that you should consider how you could demonstrate to the FCA, were they to scrutinise you, that your one solution is good value and meets every client’s needs……I’m going to pull no punches now and you’ll have to forgive me, if you are simply selling a product and dressing it up as “advice” then you should be concerned, if your demographics are all the same (same objectives for every client, same solution with high charges and all different clients) then I don’t think that you can afford to sit back and relax. On this question of “value” the FCA is like me, “a dog with a frisbee” and we both are uncomfortable with poor value for customers in investments. Before you shout in chorus “investment returns are not our fault and cannot be guaranteed, you could get back less than you invested!” I am referring to high, unnecessary charges and overly complex and unnecessary features on the plans being recommended. 

Retail Lending – Three clear objectives were identified

1. Reducing harm from high-cost credit (overdrafts and rent to own for example)
2. Reducing or stamping out credit arrangements where it is designed to profit greater from default by borrowers than diligent repayment
3. Making mortgage switching easier and fairer

Now I can’t imagine that many of you sell or advise much on high-cost credit or unfair loans that make more money from defaults(we all remember the limits imposed on short-term lenders) but as an adviser I think that you have a part to play here by identifying when your clients may hold a risky high-cost credit arrangement as part of any normal fact find, remember you are there to give advice as well as sell something!

On retail mortgages we already have a wide selection of informative and helpful regulations from the FCA to give consumers the ability to make an informed choice and in a mortgage switch, if you as the adviser are not comparing directly the existing and proposed solutions clearly and fairly then you are not doing your clients the service they deserve and frankly are doing yourself a disservice. My advice to all our Mortgage Advisers? Use a Suitability Letter every time, make it clear and helpful, show in writing what a great deal your client is getting and how your advice is worth the remuneration you receive, if you are wary of using a SL with a mortgage then perhaps you could benefit from some training to show you why they are helpful and demonstrate value…..IFAC stands ready!

Pensions and Retirement Income – (This is my “jam” as I have spent 25 years in Corporate and DB pensions, I know “nerd!”)

1. Retirement Outcomes Review (ROR) Identified those entering Drawdown often struggle to make decisions on investment
2. Non-Workplace Pensions, here the FCA are undergoing an assessment of the market to see if it is working as they intend it to…..watch this space (unless you’re already crystallising benefits of course)
3. Defined Benefit Transfers, here the FCA is adamant that any firms that present “harm” to consumers, will be targeted for action.
4. Independent Governance Committees (IGCs) and extending their remit to monitor and oversee workplace pensions and they are considering extending this to cover pension drawdown too…..more to come I feel.

What I feel this one means to you, if you advise on pensions and especially Drawdown or Pension Transfers (DB to DC) is that quality of advice and value for consumers remains vital. It is not enough to do a “light-touch” at retirement recommendation, if you don’t do proper research, cashflow modelling, stress testing, mortality analysis and effective sector reviews then are you really doing the job you should be? After all this is someone’s income in later life, for all but the super-wealthy, this really is important and you need to be striving always to get it right for every client. This is an area that we at IFAC feel is vital and as I see it should work in this fashion……. Fact find (very thorough), review any existing provisions pre and post retirement (including detailed investment reviews), establish objectives plus income and capital needs, ATR, research, Suitability Report, implementation, regular reviews……On the face of it simple enough to write and in my own experience, simple enough to execute. You can show that you don’t fall foul of ROR here so simply.

Now DB transfers usually has 90% of advisers pale and shivering with fear, why on earth would anyone advise on something that has so much risk for the adviser??

After 25 years in the Corporate and DB pensions market and including leading many hundreds of millions in DB transfer projects over the years (ETVs, PIEs, Bulk Buy-Outs) I still remain a firm believer that DB to DC can work for certain customers and that to ignore a retained DB benefit just because of fear of litigation is ridiculous. (this is the same mentality that stops people attempting CPR in case they get sued! Ludicrous and another story with me entirely….)

Yes a DB to DC transfer has no liability end and yes they can be complicated and time consuming but I believe for the right client they can be invaluable (personal experience of a terminally ill client whose DB scheme didn’t offer severe ill health benefits and a transfer was his best and most suitable option for his personal needs and goals) imagine if the adviser had just said “no thanks but I’ll switch your ISA for you instead”

The really big issue here and one that I share with the FCA is the use of “Contingent Charging”. Here an adviser only charges a fee if the transfer out of DB goes ahead. To me this already screams of selling products rather than advice and DB is in my mind where real and proper advice (i.e.  no need to sell a pension plan to the client to get paid) is obvious and critical. How on earth can you give advice where you don’t get paid unless you transfer the client out of their DB scheme? This is the most detailed and expensive advice we could give I feel and most advisers will only get paid upon transfer? This must be wrong surely?

The FCA and I agree here that Contingent Charging is a blatant conflict of interest and in my opinion a silly way to approach this subject.

DB is difficult and is one easy area to demonstrate that you give really meaningful and unbiased advice on what is really best for the client. CHARGE A FEE FOR YOUR SERVICE. Then you are unconcerned with the outcome and can hand on heart give best advice to the client on what to do with their DB scheme, if you need to build in charge offset, where they pay a fee regardless of the advice (to retain or transfer) and if they transfer the fee is deducted from the implementation costs, that way you don’t risk losing a lot of time and money on the recommendation and should the outcome be to transfer the client pays a fair fee and your get remunerated for all the work you do…..I have been using this approach since the late 1990’s on corporate pensions and DB myself, I have always charged fees for my time! You should too.

Retail Investment Scams – Extending the review to discretionary investment managers used by advisers/wealth managers and especially those using SIPPS for drawdown and high risk/high charge assets/funds This is no surprise really as the FCA has been for a few years now, looking into high charge and high risk funds used by wealth managers and whether they are causing harm and this looks set to continue. I would suggest that if you are using a DFM for all your client’s assets and it is highly charged, then perhaps you may wish to look at how else you could provide advice to your clients in this area, do you have alternatives you could utilise? Are you certain that the advice you are giving is robust, transparent and suitable for every client?

Investment Platforms Study – Here the FCA indicate that competition in the investment platform market was working well but that switching platforms was perhaps not as easy as it should or could be for consumers, this was largely connected with the transfer of assets and the communications related to it.

So if you use a platform for your clients (those that can benefit from one anyway) the message here is that they appear to be working pretty well day to day but that they could do better when switching. Perhaps my message to you here is that your clients don’t have to stay with one platform religiously, switching is allowed and should never be ignored if such a switch offers potential and tangible benefits to your client (maybe consolidated tax vouchers and reports for OEICs/UT clients??)

Retail Banking – Essentially that the retail banking sector has much to do to improve competitiveness for customers, improve the reliability of payments services for customers and remove the price discrimination in the savings market (fair treatment of existing customers above)

General Insurance and Protection – Here the FCA identified that again existing customers were being treated unfairly over new customers with higher rates or poorer deals, they also identified that poor service and product oversight was a risk where complex distribution chains exist (re-insurer -insurer – agent – broker – service providers – customer for example) and potential high and multiple charging that may exist.

Wholesale Financial Markets – LIBOR Replacement by 2021 by the risk free rate. Ongoing monitoring of MiFID II and various EU regulations to be implemented.

So there we have it. I read it all, several times and hopefully I have picked out the points that I feel are of relevance to IFAC members, plus I have added some commentary that I hope is of use (plus a small dose of my personal flair or translated as sarcasm!)

Whilst we cannot guarantee that we understand always what the FCA is trying to say or do, we do believe this, they are committed to carrying out their latest business plan, come hell or high water and those of you with experience will know what I mean here.

Their key message this year seems to focus on the word “Harm” and between you and I they are coming at regulation from the perspective of trying to identify and reduce potential harm to both customers and the industry as a whole. This cannot be considered a bad thing!