The Financial Conduct Authority’s (FCA) comprehensive and high anticipated suitability review has found greater levels of suitable advice and disclose among restricted firms compared to independent outfits, as well as higher levels from networks compared to directly authorised businesses.
While this makes sense, largely due to the greater resources available to bigger firms, it is only part of the picture. Nevertheless it can be expected the FCA will now direct supervisory work towards small IFA firms on the back of these results.
The network model has been under considerable strain, with most networks either now closed or consolidated in recent years.
The FCA’s review also does not account for the major unsuitable advice blow ups at networks that repeatedly shook the market. Those which are still around, and which took part in the review (the FCA did not name names) seem to be doing a good job. But the sword of suitability cuts both ways. While a large firm can marshal resources to create a robust and scalable process across all its members, any flaw can metastasise into a cancer that spreads with hugely damaging results.
The regulator said Palmer failed to implement an effective risk management framework between February 2010 and December 2012, and failed to ensure the network’s appointed representatives and individual advisers would give suitable advice to approximately 40,000 customers.
In July 2013 the FCA fined Sesame network £6 million over advice failures. In October 2014 Sesame was fined again for arranging 'pay to play' deals with providers. This time the regulator levied a lower fine of £1.6 million.
Similarly to Financial Ltd it failed in its oversight of appointed representatives, treating the advisers as its customers rather than the clients.
In 2012 IFA group Honister Capital, which consisted of networks Sage Financial Services and Burns Anderson, collapsed due to failing to secure professional indemnity insurance, in part because of legacy claims against its network. The Financial Services Compensation Scheme has paid out millions to former Honister clients.
And so on and so forth.
Networks that took part in this review are the beneficiaries of Darwinism, as they survived and evolved from mistakes made by others. But it’s a positive result for today’s clients and all firms should be happy about that.
It must also be noted that the suitability review also looked closely at disclosure and the FCA’s findings are less positive in that area.
The FCA found the acceptable disclosure rate was 75% across restricted firm files and for independent it was 39.5%.
I used Twitter to ask ex-FCA technical specialist Rory Percival whether disclosure included exampling the nature of restriction. Anecdotally there are some examples of very unclear communication when it comes to explaining to what degree their service is restricted, with many using the term ‘restricted whole of market’, which is not recognised in regulatory terminology. Percival said simply that explaining restriction ‘will be part of the test’. That is certainly an area we will be asking the FCA for more detail on.
When it came to delivering suitability independent firms scored 90.8% vs. restricted 97%.
However, the FCA has not revealed how many independent and how many restricted firms took part. This seems a little odd. After all, by publishing percentage splits between restricted and independent firms the FCA has pitted one against the other, but the numbers could be skewed by looking at say a few large restricted firms who did it well and many smaller independent firms with much greater variety.
It is possible the regulator was just not interested in the difference between independent and restricted advice. Why go to the bother of publishing this data if this is the case though? I can only assume there is nervousness about firms being identified.
Finally, the good news. The FCA said its review ‘also identified several examples of firms demonstrating good practice and going beyond compliance with our rules’. It said this was evident across all three advice areas, including retirement income advice where firms had to deal with the ‘significant’ change brought in by the pension freedoms.
While bigger firms might have the advantage of resource I wonder if smaller firms are using their extra flexibility to get streets ahead, really maximising client outcomes rather than simply passing the suitability test. The FCA said it would publish examples of this good practice as well as what was unacceptable and in my view cannot do this soon enough.