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What’s on the regulator’s radar in 2013?

There is likely to be as much regulatory activity in 2013 as there was in 2012, and adviser firms should pay attention to areas that stand out as ripe for review, writes Melony Holman of Compliance and Training Solutions.

In 2012 there was a constant flurry of guidance documents, consultation papers and speeches from the regulator that needed digesting, as well as the annual Retail Conduct Risk Outlook paper and enforcement action taking place throughout the year. This can give an idea of some of the issues that may affect financial advice firms in 2013.

There are four main areas the regulator is likely to examine: unauthorised advice, the remit and strength of the Financial Conduct Authority, replacement business and centralised investment propositions (CIPs), and how IFAs are doing on delivering independent advice. But those aren't the only issues you may face...scroll on for advice in key areas.

Scrutinising advice

The regulator is likely to focus on identifying advisers who are giving advice when they are not authorised. There would have been a flurry of advisers deauthorising at the end of December 2012.

Enforcement action was taken against two people for giving unauthorised advice in May and October 2012, demonstrating that the regulator is serious in taking action where this breach occurs.

It made a further show of its focus in this area via some of the entries on the questionnaires that firms were required to complete in the run-up to retail distribution review (RDR).

Firms are required to fill out a Form G by the end of this month confirming that advisers in the practice have their statement of professional standing (SPS) so this will be cross-checked against the Financial Services Authority (FSA) register at some point. Expect to see disciplinary action taking place relatively early on in the year.

FCA will bare its teeth

The FCA comes into effect in April. It will want to show its teeth from the outset, demonstrating to firms, consumers and the Treasury it means business. It will be more prescriptive and will take an approach similar to that in the days of the Personal Investment Authority and The Financial Intermediaries, Managers and Brokers Regulatory Association.

Those who did not get on with principles-based regulation will welcome this approach but it also means firms will need to know the regulator’s handbook better.

Replacement business and CIPs

A review of replacement business and centralised investment propositions is possible. The FSA published a final guidance paper on the subject in July 2012. This paper made it clear that the client needs to be made fully aware of the difference in costs between the contract they are in now and the new contract, including adviser costs, initial and ongoing charges.

Firms must also act in their clients’ interests and not transfer funds into their centralised investment approach purely because it is easier to manage. As more investors are placed onto platforms, this will be a key area the regulator will be examining.

Firms should make sure their clients are put into an ‘informed position’ so they can make an ‘informed decision’ if they want to avoid the regulator classing a file as unsuitable due to non-disclosure.

For firms that conduct a lot of switching business, professional indemnity (PI) insurers will be paying closer attention to how this business is controlled and monitored so premiums may increase further.

Independent advice

Towards the end of the year, there is likely to be a review of how independent firms are proving they are delivering independent advice whenever a retail investment product is recommended to a client. This will include the adviser showing they have the knowledge to deliver independent advice and advice off-panel when or if appropriate.

Other concerns

Other areas that firms should be mindful of are:

Form filling

A form G will need to be completed whenever an adviser does not attain the SPS or loses their SPS, receives three complaints within a rolling 12-month period or compensation of more than £50,000 is paid out on a complaint...

...Eye on the clock

Evidencing that advisers are conducting the 35 hours minimum continuing professional development, of which 21 hours need to be structured...

...Trigger events

The impact of the legacy commission ban, which kicks in whenever a trigger event occurs...

...Cru costs

Fallout from the Arch Cru compensation scheme, which starts in April 2013. A high percentage of firms will not be able to afford to pay compensation particularly if their PI insurance does not cover them. In turn, this will have an impact on the Financial Services Compensation Scheme levies perhaps towards the end of the year, when more and more firms become insolvent. Wider implications may include an impact on PI insurance, with more insurers exiting the market and premiums increasing...

Cap ad hike

Capital adequacy will increase to £15,000 or four weeks’ fixed expenditure, whichever is the highest, on 31 December 2013.

There will be many more areas under scrutiny, and to which firms will need to pay attention. One thing is certain: 2013 will be as eventful as 2012.

Mel Holman is director of Compliance and Training Solutions.