The Financial Conduct Authority (FCA)’s ‘Dear CEO’ letter on 7 October highlighted some concerns that have been voiced widely among many industry participants.
There were some key follow-ups to issues that have already been highlighted since the Consumer Duty regulation took effect last year. They include the long ticking time-bomb of ongoing advice, a follow up to its recent thematic review on retirement income advice; and the suggestion that firms have pressed ahead with acquisitions without seeking the necessary regulatory approval.
The latter unfortunately is a remarkable situation. But it is hard to imagine why this acquisition approval problem would merit a mention if it hadn’t been identified as having happened with some degree of frequency. It gets top billing within the FCA’s Dear CEO letter – including threats of criminal prosecution.
Within the letter, the FCA announced that it plans to undertake multi-firm work to review consolidation within the market. Where the FCA receives notifications from individuals or firms to acquire or increase control in regulated firms, it will assess and challenge their suitability and the financial soundness of the acquisition.
Client outcomes
In my opinion, the most interesting area of focus for the consolidation review which has failed to be fully discussed in the industry since the Dear CEO letter was published. This is the conduct of consolidators once transactions have gone through.
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Unfortunately, the range of matters covered by that consideration is such that the letter is necessarily vague in referring to good outcomes, culture, leadership, governance, oversight arrangements and control. That is no criticism, it is just how regulation works. Nobody wants the regulator to be so prescriptive that it effectively tells management how to ruin their business.
The topic of client outcomes is an interesting one that needs more discussion. Client outcomes should be central to all of us in the wealth industry, while many of the other topics touched on are peripheral or, at the very least, co-dependent.
It would be facile and disrespectful to suggest that all consolidators/private equity investors are entirely focused on their own interests over those of the clients within their umbrella of control. But it is fair to suggest that there is a material risk of misalignment when, inevitably, the timescale for investment by such firms is highly unlikely to be for the lifetime of clients investing with them.
Independence
The industry should not be kidding itself that companies’ cultures will remain consistent across decades of management changes, although it is certainly worth considering whether the likely timescales for exit may impact on the service offered, there is a wider issue at play.
There should be a big concern from the wealth and advice industry by the omission in the Dear CEO of a subject on which I believe is worthy of specific consideration: the very real question of whether firms, and particularly those in networks or consolidation groups with a vertical integration model, claiming independence really meet the regulatory criteria demanded by that description.
Clients value that label, although whether there is a thorough understanding of it may be open to debate. But, surely, a primary benefit of consolidation is to garner economies of scale, and it is most certainly worth asking who they accrue to – firm or client?
See also: BNY’s Parkin: Greater action needed on retirement income advice
From a pure commercial perspective, it must make sense to have as many clients as possible invested in a provider’s centralised investment proposition rather than allowing individual advisers to identify other services which may match client requirements better and provide better value.
Unless advisers do have that level of freedom than it seems evident that those economies of scale are much more likely to benefit the firm rather than investors unless the investment proposition genuinely does represent the best value in the market and there is scant evidence to suggest that the large consolidation groups have offerings that meet that definition.
It is far more likely, and it is also borne out by numbers, that smaller more innovative providers can often deliver better performance at a cheaper price – and it can hardly be denied that they are the chief contributors to delivering value and therefore good customer outcomes.
Conclusion
My hope is that, within the broad and rather general swathe of issues which the regulator wishes to see addressed, the independence and client outcomes problem is one that gains appropriate attention.
Perhaps the real debate is whether the definitions of tied, restricted and independent remain fit for purpose because I cannot believe that the general investing public really understands what they mean currently.
In an age where clarity of service is quite rightly seen as an important factor in the service provided to retail investors, it is something that should perhaps be addressed.
David Ogden is compliance officer at Sparrows Capital
