Register to get unlimited access to Citywire’s fund manager database. Registration is free and only takes a minute.

Adviser charges and platform problems: FCA sets out plans for next year

The FCA has published its business plan for the next year, including a focus on adviser charges and investment platforms.

FCA sets out future

It may have been somewhat overshadowed by the announcement that the UK is set to head to the polls in a general election on 8 June, but the Financial Conduct Authority (FCA) this morning set out its plans for the year ahead.

The annual business plan may not immediately play on the minds of advisers as the public votes, but it will have a significant impact on firms over the next 12 months and beyond.

New Model Adviser® examines what the regulator will be looking at and how advisers might be affected.

FCA sets out future

It may have been somewhat overshadowed by the announcement that the UK is set to head to the polls in a general election on 8 June, but the Financial Conduct Authority (FCA) this morning set out its plans for the year ahead.

The annual business plan may not immediately play on the minds of advisers as the public votes, but it will have a significant impact on firms over the next 12 months and beyond.

New Model Adviser® examines what the regulator will be looking at and how advisers might be affected.

Are advice charges value for money?

As anyone who reads New Model Adviser® regularly will know, the FCA has taken an interest in advice charges for a while.

Today its Sector Views paper, published alongside the Business Plan, the regulator said advised clients ‘may not be getting value for money’ from charges.

‘Relatively few advisers are transparent about their pricing before they sell advice. This does not incentivise advisers to compete on price and may result in limited pressure on them to reduce their charges,' the FCA said.

According to the regulator lack of competition between advice firms could be keeping charges high, and some charging structures are 'opaque and complex' to investors.

Are vertically integrated firms playing fair?

Alongside airing concerns about charges in all advice firms, the FCA also specifically highlighted concerns about vertically integrated businesses.

Vertically integrated firms are those which own all parts of the investment chain. This usually includes advisers, funds and a platform are all owned by the same firm.

The FCA said vertical integration risked ‘reintroducing conflicts of interest' that the retail distribution review (RDR) had eliminated.

It said the number of vertically integrated firms was increasing as product providers seek direct relationships with consumers and intermediaries develop in-house investment solutions.

The FCA described tax wrapper providers who offer in-house investments deciding to ‘evolve their business models’ into wider retail investment and platform distribution – which it called ‘rational sequencing’.

The FCA said: ‘Our assessment suggests that risks remain regarding the remuneration of individuals, especially within vertically integrated firms where customer-facing employees could be incentivised to sell in-house products and services.’

Is the platform market fit for purpose?

Advisers are not alone in facing FCA scrutiny on charges. Platforms also came into focus when the regulator looked at the asset management market last year.

Now the regulator has announced plans to review the platform market to gather whether it is performing for consumers.

The FCA blamed ‘poor competitive pressures’ on the demand side for a ‘clustering’ of prices in various areas of the platform sector.

It said: ‘The interim report for the asset management market study identified a number of potential competition issues in the investment platforms market. These included: complex charging structures, if platforms’ investment tools enable effective choice and whether platforms have the incentives and ability to put competitive pressure on asset management charges.

‘We will conduct a market study to explore how “direct to consumer” and intermediated investment platforms compete to win new and retain existing customers.’

When deciding the scope of the study the FCA said it will take into account relevant feedback already received as part of the asset management market study.

Will Brexit hurt the FCA?

One topic which was always going to be mentioned in this year's plan was Brexit.

FCA chief executive Andrew Bailey (pictured) warned leaving the EU 'creates a high risk of disruption to our business plan priorities' as a settlement is reached.

‘Leaving the EU inevitably creates a higher risk of disruption to our business plan priorities. So it is particularly important that we retain the flexibility to respond swiftly should we need to review them further,’ he said.

Thankfully the government hasn't made any other announcements after the publication of the plan which might create further uncertainty...

The FCA also set out five areas which it will be focused on with its advice to government. These are:

• Cross-border market access
• Consistent global standards
• Cooperation between regulatory authorities
• Influence over standards
• Opportunity to recruit and maintain a skilled workforce

What is going on with Sipps?

The FCA is going to investigate Sipp providers, particularly looking at how they deal with non-standard assets.

You would be forgiven for thinking you've heard this one before, and that's because by our counts it is the fourth time the regulator has in some way or another delved into how Sipp providers run their businesses.

This time the FCA announced that as part of plans to review non-workplace pensions it will 'undertake further work on non-standard assets and self-invested pension plans to look at the culture and governance of Sipp providers'.

With so much focus on pensions at the moment it will be interesting to see what is found.

How can phoenix firms be stopped?

One potential bit of good news for advisers is that the FCA seems to be getting serious on so-called phoenix firms.

Phoenixing is not illegal. It is a widely used administration tactic that allows company directors to escape personally footing the bill for a failed firm’s liabilities.

However the practice attracts criticism from advisers because liabilities arising from complaints against collapsed IFAs fall on the Financial Services Compensation Scheme, which is funded by a levy on the whole adviser community.

FCA director of supervision for investment, wholesale and specialist, Megan Butler, said: ‘It’s a concern that we very much share and indeed individuals within firms who can move around, particularly small firms.

‘It’s one where we are gathering the best data we can and working with the industry to do that. It’s very important that we keep some of those individuals and firms out of business.’

Jonathan Davidson, director of supervision for retail and authorisations, added: ‘On the issue of phoenixing, we are looking at how we can improve our management information (MI) to really try to pick up on those forms of intelligence about what is going on to make sure that we deal with those issues.’

What would happen if an asset manager failed?

An intriguing question posed by the FCA is what would happen if an asset manager failed?

In its mission statement, the financial watchdog described this systemic risk as an 'area of focus'.

The watchdog is concerned that a 'disorderly failure' of investment managers and/or their portfolios could disrupt the financial system.

'Market stability could be affected by the failure or disorderly wind-down of a very large asset manager or several asset management firms as end-investors attempt to redeem their holdings on demand, creating a downward selling spiral,' the FCA said.

Has anything gone wrong with non-advised drawdown sales?

Another familiar refrain from the FCA in today's paper was a focus on non-advised drawdown sales.

Last summer the FCA said it will probe non-advised sales of retirement products including drawdown as part of its Retirement Outcomes Review.

Today in its business plan, the FCA said it will be looking at a sample of some providers over the way they are selling non-advised drawdown and look to see if these firms are complying with the current rules.

‘We will review the sales processes and ongoing communications of a sample of firms making non-advised drawdown sales since the pension freedoms were introduced,’ the FCA paper said.

‘We will assess whether firms are complying with our rules by giving customers adequate information to make an informed decision when they decide to draw down their pension. We will also examine if firms give their customers adequate post sale information to enable them to continue to make decisions that support good outcomes.’

How much will advisers pay in levies?

The FCA also published its expected levy fees for the next year today.

Advice firms will collectively pay more towards the running of the regulator in the next year, though an increase in firm numbers will see individual businesses pay less.

In total advice sector fees to the Financial Conduct Authority (FCA) will rise 4.7% from £73.7 million to £77.1 million. This will be shared between a 9,779 firms in the fee block, A13, which is 2.9% more firms than the previous year.

The FCA proposed increasing the minimum fee for small firms for 2017/18 by 1%, to £1,095, ‘to reflect the inflation increase in our ongoing regulatory activities’.

The FCA’s annual funding requirement for 2017/18 is £526.9 million. It is an increase of £7.6 million and includes an additional £2.5 million cost set aside for costs associated with leaving the EU.

Comment & analysis

Twitter