What the FCA has planned that affects your business
What’s in the FCA’s business plan for 2016/17 and how will it affect your business – now and in the future? ATEB Consulting’s Steve Bailey looks at the plan from a compliance viewpoint
Some firms don’t bother with a business plan and all that strategic stuff, preferring instead simply to turn up each day and just keep seeing clients.
But, even if you do not work to a plan in your own business, you would be well advised to be aware of what is in the FCA’s current business plan as this will ensure you understand what the regulator’s priorities are for 2016/17 and how they might affect your activities and your business.
The FCA undertakes a continuing assessment of risk in the market. As well as looking at big picture economic and political risks, the regulator also assesses risk at a more detailed level in order to ensure that supervision resources are targeted efficiently and are aimed where the risk to its objectives is likely to be highest.
The paper reminds us what the FCA’s key objectives are:
• Protecting consumers;
• Ensuring market integrity;
• Promoting effective competition.
Supervision takes three forms:
• Ongoing proactive supervision of firms that present most risk;
• Event-driven, reactive supervision of actual or emerging risks;
• Thematic work, focussing on risks and issues affecting a number of firms across the market.
As a result of their current perception of where risks lie, the FCA has set the following seven priorities for the coming year.
• Financial crime and Anti-Money Laundering
• Wholesale financial markets
• Innovation and technology
• Firms’ culture and governance
• Treatment of existing customers.
The three areas that are likely to be of most immediate interest and relevance to our readers are Pensions, Advice and Innovation and Technology so let’s have a look at those in a bit more detail.
This area is a priority mainly as a result of the fundamental changes that came with Pensions Flexibility in 2015 and the increased likelihood for consumers to be tempted by the lure of accessing lots of cash or to become the victim of a scam for the same reason.
People are living longer than ever before and over 85s are already the fastest growing segment of the UK population. This means that consumer choices throughout retirement are becoming more complex and the need to make the right choices for the longer term are more important than any short-term temptations.
Costs matter. Pension products with high charges exert a significant cumulative reduction in fund values.
The tax incentivised waters are getting muddier all the time. New savings and dividend allowances, new ISA vehicles and a continuing expectation that the tax regime surrounding pensions will be changed at some point means that advising consumers who wish to save for retirement is no longer as simple as recommending the ‘best’ personal pension plan. The possible options carry different risks and advice implications.
Some consumers are unable or unwilling to engage with pension savings and many struggle to save at all, which is likely to lead to an underfunded retirement.
This is also a priority largely driven by the changes in the pensions market. As indicated above, consumers are having to make ever more complex decisions, and the consequences of making the wrong decision can be significant and long lasting.
Accordingly, the FCA considers that a well-functioning advice market is essential, but it also believes that the market is not fully effective at this time, with many people who could benefit from advice, not able to find advice at a price commensurate with their needs and resources.
So, the regulator is seeking a number of outcomes in relation to advice:
• Affordable, accessible advice options that meet consumers’ needs.
• Advice is of appropriate quality and suitable for consumers’ needs.
• Advice, including low cost advice, is delivered in innovative and accessible ways.
• The cost of advice is clear and transparent.
• Firms develop good quality, transparent and low cost non-advised options for consumers who do not want advised services.
These imply that firms might need to think again about the profile(s) of the clients that they currently deal with and the, perhaps different, client profile(s) that they could deal with if only it could be done profitably. Anyone for segmentation?
Which leads us nicely to the final area that we will look at in detail.
Innovation and technology
The business plan covers a whole range of topics under this heading, including system vulnerabilities and cyber-attacks. But the aspect that is never far from the surface is how firms might use technology to deliver those affordable, accessible low cost advice solutions so frequently mentioned.
There is no doubt about it – advice is expensive. And the less money a consumer has the more expensive advice becomes in relation to the benefit gained. Now, a properly costed face-to-face advice process is not overpriced in itself – it’s just that many consumers neither need nor can afford a Rolls Royce service – their more limited horizon can be reached in a lower cost vehicle.
And that is where the challenge for adviser firms lies. It is not possible to charge significantly less for your full planning service – its costs what it needs to cost! So the problem has to be solved by creating a different type of service – one that delivers advice, guidance or support proportionate to the consumer’s needs and ability to pay and which is good value in relation to the benefit gained from that support.
The actions that the FCA plans in this area are:
• Project Innovate – intended to help firms of all sizes develop innovative ideas that might meet consumer needs;
• Regulatory Sandbox – creating a safe place for eligible firms to test new ideas to ensure they meet regulatory standards. Unauthorised firms will benefit from restricted authorisation for testing purposes and all eligible firms will have the potential benefit of individual guidance, waivers and no enforcement action letters;
• Creation of an ‘Advice Unit’ – intended to support firms that wish to create automated advice models with the potential to deliver affordable and accessible advice to consumers.
The regulator wants to strike a balance between supporting innovation that benefits consumers while ensuring they have adequate protection.
The three priorities that we have focussed in on here are all interlinked. The pensions reforms have created new temptations for consumers and scammers. And, new opportunities for advisers too.
The need for transfers of more than £30,000 to be done with advice, and the ever-greater complexity of choice and decisions faced by consumers is the unstoppable force that is pitched against the immoveable object of the way that financial advice has been delivered traditionally, with its higher end outcomes and higher end cost.
The pressure from consumers who could benefit from advice is likely to remain unstoppable, so firms are going to have to decide:
• whether they will continue to only offer a higher end service and hope that they can continue to find enough higher end clients to advise; or
• whether they will embrace the challenge of creating a different service for those clients with more modest needs and smaller wallets, while still being compliant and profitable.
Make no mistake, the second option is not easy and will not suit every firm. There are undoubtedly real regulatory obstacles currently in the way of achieving automated advice and it is somewhat ironic that the type of business that is probably furthest away from being able to be auto-advised is pensions in general, and transfer to drawdown in particular. But there are benefits to be gained for both consumers and adviser firms if the automated advice nut can truly be cracked.
• Re-look at your client proposition – have you segmented your client base appropriately and do you have a range of differently priced services that suit each segment, for new clients as well as existing? If not, should you? Could you?
• Be aware of the temptations and dangers that last year’s pension reforms brought with them – for advisers as well as clients.
• Find time to read the FCA’s work around the science of consumer choice. Advisers involved in transfer and/or drawdown business should particularly read the first paper listed below. It might change how you present your advice.
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