We always look for ways to revamp ourselves at the start of a new year and it is inevitable the FCA will set a few improvement goals for the financial industry in 2025 too.
With a busy 2024 under its belt, the regulator is likely to maintain momentum with action in three key areas.
The pace of consolidation in the adviser industry has captured the interests of the regulator and it will want to be swift with any new missives, while further tests to ascertain the robustness of Consumer Duty seem all but certain.
And in the year that the FCA reaches its 12th birthday, it feels like the moment is right to traverse the proverbial quagmire of the advice versus guidance debate.
While this improvement to-do list belongs to the regulator, any outcomes obviously impact everyone operating in the industry.
Consolidating stance on consolidators
With its thematic review of consolidation activity already underway, it’s highly likely that the FCA will want to issue policies or guidance to help ensure best practice in this area.
Data published earlier this year showed that the number of retail investment advice firms had dropped by 435 in around 18 months, with consolidation believed to be the dominant factor behind the reduction.
Furthermore, in 2022, there were 34 private equity-backed advice firms, some of whom were building vertically integrated structures with their own platforms. Such owners are likely to try and detect perceived undervalued assets to bolt-on or encompass within their adviser business.
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The regulator will no doubt want to make sure that consumers aren’t just being given the illusion of choice in regards to their investment options and ensure that where there are restrictions, that these are readily communicated from the outset.
Consolidation is not going away, and so those already partaking in it or considering it will be eagerly waiting to see what extra regulatory hoops they may need to jump through.
The latter stage 2024 also saw a number of independent firms announce arrangement with fund managers to provide bespoke model portfolios, doubtless with fee-sharing agreements in place. That feels like thinly disguised vertical integration to me, and I would suggest that it could easily put genuinely independent status at risk.
Nurturing Consumer Duty
Another regulatory development surely has to come in the form of an update or assessment of Consumer Duty and how it is being implemented in the industry too.
A bit like buying a new paint colour for your sitting room, you would test it out on a discrete area of wall rather than slathering it straight on; the FCA has undertaken the equivalent of this with a Consumer Duty stress-test.
The regulator revealed its views on good and bad practice within the gap insurance industry in 2024. This relatively niche area of the market – estimated to be around just £152m in size according to FCA data – provided fruitful stomping ground for the FCA.
There is probably internal logic at the regulator to look at a sub-sector it perhaps already had concerns about, but it also meant it had a dry-run before tackling more meaningful and systemic sectors such as investment management and pension drawdown.
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This means that for those areas of the industry that could be next, it would be wise to absorb the analysis carried out on gap insurance and try to draw any parallels with one’s own sector.
I’m particularly thinking about the relationship between price and value, and, crucially how a firm needs to be able to justify or explain both.
A rock-bottom price doesn’t always equal value, just as value may not always be derived from an expensively priced investment or service. Firms need to find their own way, be sure all their employees are on the same page and that their clients understand what they are paying for and why.
Something which is, and will remain, challenging is providing definitive evidence of good outcomes, particularly for firms which do not have direct relationships with retail clients. Although the validity of this business model has been validated explicitly by the regulator firms operating in this way, it is far from clear what steps can or should be taken to demonstrate that things are as they should be.
Cracking the guidance quandary
And talking of pages, there’s one in particular that I believe the FCA would like to turn once and for all: the age-old conundrum of where the boundary line is between advice and guidance.
Regulators have been trying to define this for at least 20 years, if not longer, all the while the unintended consequence of RDR and Consumer Duty appearing to widen the advice gap.
That means, one could quite robustly argue, that the need for guidance has never been stronger, especially given consumers can now access pension cash thanks to former chancellor George Osborne’s pension freedoms policy, and also have the potential to make choices about how their pension is invested within auto-enrolled schemes.
As such, there is a real incentive for the FCA to crack the advice/guidance nut.
Even if they do, though, the next problem – and one potentially beyond the regulator’s control or influence – is who is going to supply this guidance?
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Making money from guidance has foxed pretty much all comers, and even if the regulatory guardrails were more easily defined, that lack of supply might not change overnight.
That’s unless some savvy operators can make robo-guidance work; robo-advice has not been the death-knell to conventional advice that it was originally predicted to be, so perhaps guidance is where digital technology can shine.
If the FCA fires the starter gun on a new guidance regime, then participants may emerge. However, the regulator has suggested that guidance should be provided free of charge, but I struggle to see a rush of volunteers stepping forward on that basis.
If the regulator conquers these New Year’s resolutions, it will be able to chalk 2025 up as a success, but if it does not, like many of us, it will be rehashing its aspirations for 2026.
David Odgen is head of compliance at Sparrows Capital
