The director of consumer investments at the Financial Conduct Authority (FCA) has said the regulator wants to see “changes” to advice firms charging models.
Therese Chambers was speaking during the Dynamic Planner – The Power of Now conference, attended by International Adviser, in London on 7 February 2023.
She discussed what the FCA is expecting from advice firms in terms of implementing the Consumer Duty, which she called a “watershed moment” in its approach to the regulation of retail financial services.
Chambers said that the regulator “will be looking for fundamental changes in how firms think about and treats their customers”.
She added: “Our pre-existing governance rules have been focused on financial advisers as distributors of investment products. Under the duty this changes, and the providers of services, such as advice and discretionary management, are now also regarded as manufacturers of these services. This means that advice firms need to think about whether their advisory services meet the needs of different consumers within an identified target market.
“This will be a new challenge, a new approach that firms will have to engage with. They will also need to ensure that their charges are commensurate with the value provided to customers that they serve. Firms with a homogenous one size fits all service and charging models should be thinking about that. We are expecting to see changes to charging models.”
Raising standards
Chambers also discussed that the Consumer Duty will not be a regulation which simply rewrites the motto ‘treat customers fairly’.
“Customer outcomes need to be at the heart of firms’ business models,” she added. “Firms will need to understand the impact their business has been positive and negative through the lens of their customers objectives.
“This encompasses every aspect of the firm’s operations, including product design, marketing, customer service levels, staff training, governance management and remuneration policies, amongst many other things.
“We expect that firms will pay as much attention to customer outcomes as it does to revenues, or the profit and loss account. This will need to be reflected in both governance and operational processes. These changes are in the interest of consumers, but also in your interest. Because what this is about is building a sustainable market that attracts the trust and confidence of consumers, which is good for all of us.”
Current state of market
The FCA’s director of consumer investments also discussed that the advice market has come a long way since the last mammoth piece of regulation the Retail Distribution Review (RDR).
“Since RDR, the FCA has conducted a number of formal evaluations in its impact, as well as undertaking a programme of supervisory work to assess the market,” Chambers said.
“The picture which emerges from the collective evidence is positive. The advice market is improving, albeit slowly. The removal of commission has reduced product buyers from adviser recommendations. The vast majority of advisers are qualified, at least to the minimum, with most going beyond. This has indicated positive moves towards increased professionalism. Financially, advice firms are very resilient.”
But Chambers believes that there is still a long way to go for the advice industry.
“It is, however, important to be honest about the state of the current advice sector,” she added. “The data set out where it could and should be performing better. Our consumer investment strategy of highlighting the fact that there is still a number of important aspects of the market that are not functioning as well as they need to, and more needs to be done by firms to improve outcomes for their clients.
“In terms of misconduct, we’ve had to intervene significantly, particularly in the market for defined benefit (DB) pension transfer advice, and redress liabilities as a result of scams, frauds and high-risk investments remain significant. Firms and individuals that seek to avoid liabilities and phoenix back into the market are another concern.
“In terms of access to advice, we have highlighted the fact that there’s a significant population of over four million consumers who are holding their money in cash rather than investing it. Consumers are missing out on the opportunity to make their money work better and harder for them in the longer term.
“Finally, in terms of price and value, we have highlighted concerns that some advisory clients may be receiving ongoing services that do not meet their needs, or represent value for money.”
Fix the issues
Chambers believes that it is “important that these issues are allowed to be fixed”.
“They are incompatible with the consumer investment market that society needs,” she added. “One that delivers high quality services to consumers who trust their adviser, and have confidence that their adviser is acting in their best interests.
“I also want to call out explicitly that the FCA believes that good financial advice has never been more important. Consumers are increasingly responsible for making ever more complex decisions about their financial future – whether that is planning for important goals, dealing with unexpected shocks, saving into a pension or saving to fund retirement.
“We need to work together to rebuild trust and confidence in the financial advice market.”
