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FCA pledges crackdown on unregulated firms and action on prices

The FCA has promised to look into unregulated firms, as well as tackling questions of cross-subsidies, and asked whether it should be involved in robo-advice.

Mission impossible?

The Financial Conduct Authority (FCA) has launched a consultation on a new mission statement, aiming to move away from what chief executive Andrew Bailey described as a ‘very sorry history’ of regulation.

Of course, this being the FCA, its intention to be ‘radically different’ from the past in this case involves publishing a consultation with a list of questions that initially do not seem to mean much at all.

However, it is clear the regulator has some thoughts on its future which will affect advisers.

New Model Adviser® looked at the questions the FCA asked and examined what might change at the regulator.

The FCA wants people to respond. Bailey (pictured) said the project ‘will only be a success if our stakeholders engage with us through this consultation process.’

Mission impossible?

The Financial Conduct Authority (FCA) has launched a consultation on a new mission statement, aiming to move away from what chief executive Andrew Bailey described as a ‘very sorry history’ of regulation.

Of course, this being the FCA, its intention to be ‘radically different’ from the past in this case involves publishing a consultation with a list of questions that initially do not seem to mean much at all.

However, it is clear the regulator has some thoughts on its future which will affect advisers.

New Model Adviser® looked at the questions the FCA asked and examined what might change at the regulator.

The FCA wants people to respond. Bailey (pictured) said the project ‘will only be a success if our stakeholders engage with us through this consultation process.’

Unregulated crackdown?

The FCA has said the line between regulated and unregulated activity has become blurred and indicated it will do more to step in on unregualted activity.

'Our remit for taking action for the firms we regulate is clear. However in practice the lines between regulated and unregulated activities has become blurred in recent years,' the mission statement said.

The FCA said it is more likely to take action against unregulated firms if they are engaged in activity which is illegal or fraudulent, has the potential to undermine confidence, is linked to regulated activity and questions the suitability of a firm.

'Our primary focus will continue to be on regulated activities. However, given the damage they can cause, we will intervene against unregulated activities on a case by case basis,

Should the FCA act on cross subsidy pricing?

One of the areas the regulator has started to wonder into over the last year is cross-subsidies in financial services.

Papers on Big Data have raised concerns that firms might be using the growing amount of personal information available to charge some groups more than others.

More simply, such ‘price-insensitive consumers’ (FCA’s language, not ours) exist in a number of businesses which often find ways ‘of extracting more and more profit from trapped…consumers’.

Moreover, the FCA is concerned that more active clients are given a better deal than less active clients. In turn, the less active clients may be subsidising such offers as they are charged more.

What does this mean for advice? It is tempting to immediately think of larger firms often criticised by IFAs, and perhaps this is an opportunity to raise these points formally.

However, it is also important to think about charging across advice firms. High net worth clients are likely to be viewed as ‘price-insensitive’, meaning any business which deals with them could face scrutiny over charging.

Warning notice

The question of intervention is prevalent throughout the FCA’s consultation.

Whereas previous FCA chief Martin Wheatley infamously declared he would ‘shoot first, ask questions later’ the new regime has at least taken the decency of asking firms if they would like to be shot in public.

The FCA has asked whether it should be more transparent when it gives private warnings to firms.

Such a move would inevitably raise objections from some businesses, but it could help other realise what the FCA’s position is on certain areas.

The regulator has moved towards more disclosure recently in areas such as suitability reports. Warnings, even those that do not name the firms, could be another step in the right direction for businesses which want to know what is going on.

Robo retreat?

Innovation – should the regulator encourage innovation?

The FCA has been keen to promote innovation in recent years.

In fact, the regulator has even launched ‘Project Innovate’ to help firms develop new propositions, as well as a robo-advice unit.

However, the consultation raised a few doubts about whether this was the right course of action to take.

One of the questions it asked is: Do you think it is our role to encourage innovation?

Pensions and problems

‘The availability of defined benefit pensions and sales of annuities are declining, the state pension age is rising and consumers have more options when they decide to access their pension savings.’ This is as neat a summary as you will get on the state of the retirement landscape characterised by one overpowering theme: change.

The FCA seems eager to use its own mission consultation as a chance to redefine its relationship with long term savings and investments.

‘The appropriate regulation of conduct for long-term financial products is inevitably challenging,’ it said. ‘Our work on the mission is an opportunity to assess whether this approach has established clear principles to guide the future.’

Like the government and its famous ‘nudge unit’ the FCA seems draw to act on the lessons of behavioural science. The FCA considers not just savings but the prevalence of long term borrowing on people who are likely to underplay the long term consequences of their short term decisions.

‘Growing numbers of consumers have to take very long-term decisions that will affect their financial wellbeing in retirement. This is exacerbating the challenges created by complexity, uncertainty and “present bias” (the tendency to give greater weight to pay-offs the nearer in time to the present they are) which many consumers face when making financial decisions.’

Duty of care

A formal duty of care would enable more customers to take complaints to the courts or pursue class actions, the FCA said,

The Financial Services Consumer Panel believes that the culture in financial services could be significantly improved if the FCA had a legal duty to make rules that specify what a reasonable duty of care for providers is to their retail customers.

The argument is that consumers can only really take responsibility for their decisions when firms have exercised a duty of care.

The FCA has previously argued that a duty of care is unnecessary; FCA principles are themselves FCA rules, and they include an obligation on firms to treat customers fairly.

However, customers cannot currently bring civil claims based on an alleged breach of Principle 6 (the duty to treat customers fairly) alone. A result of introducing a ‘duty of care’ might be to strengthen consumers’ ability to take action in the courts if there has been a breach of FCA rules.

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