Food for thought - an update for the Wealth Sector 2025

Last year seems a distant memory already as we get into February 2025 with an unpredictable international political and economic environment. The Chancellor has called for a focus on growth and challenged the UK’s regulators to look at what can be changed.

The FCA is preparing its strategy for the next five years and it has already communicated that it will focus more on outcomes rather than detailed rules, as well as building consumer resilience, and look to support growth. But what might this mean for Wealth and Personal Advice firms?

Sustainability in retirement

The FCA is due to publish further results of its work about income in retirement practices early in 2025. It is a big topic for Government given the UK has around ten million people aged 65 and over and 21 million people over 50, therefore a sustainable and adequate income in retirement is an imperative. This should be a call to firms to look at current practices and focus on consumer outcomes in the context of an agenda which is about the sustainability of income in retirement.

One area to look at, could be cash flow modelling and whether current processes and controls ensure good consumer outcomes. Boards should be asking how Management can assess this. One challenge is the variety of cash flow models that can operate in an advisory firm and how quality of outcomes can be assessed with multiple models.

A further area, which we are starting to see, is focus on fund value measures. Data now exists to assess value to help deliver good consumer outcomes with active monitoring of fund assessments of value. We hear feedback from customers is typically focused on investment performance as a measure of good outcomes.

What to do with smaller pots

One question that has arisen with the FCA focus on target markets and fair value, is what to do with clients with smaller investment pots. These may prove uneconomical to manage and although the FCA does allow differential pricing, one outcome of the Consumer Duty has been to put a focus on the viability of advisory services for smaller pots. Solutions have included tiered pricing models with distinct levels of advice and service depending on consumer need and portfolio size. But this is an area ripe for innovation to improve efficiencies through better use of technologies for example.

It is a question that also may be partly addressed by the advice gap proposals, where the FCA’s announcements would allow for advice to be simplified with targeted support for a specific need, rather than personal advice. The FCA sees this as part of the growth agenda, however the question remains whether the gap is too wide between access to personal advice services and more generic forms of information given the volume of people moving to drawing their income in retirement.

The FCA has recently issued a discussion paper asking for input on potential further policy changes on areas such as projections, defined contribution consolidation and transfer and the regulatory framework for SIPPs. DP24/3: Pensions: Adapting our requirements for a changing market | FCA

It is unclear whether piecemeal policy proposals on the narrow points in the FCA’s discussion paper really address the scale of the issue. The employer pension market is huge, for example, just one pension provider manages over 9,000 employer pension schemes for just under one million scheme members. But what this does show is the potential for services to reach a substantial number of consumers.

Scrutiny on fees and charges

One of the most focused areas of FCA scrutiny has been fees and charges, and in particular, ongoing service charges. There seems to be a more productive discussion between firms and the FCA about the nature of ongoing service charges and further communications are expected. Whilst the FCA is not a price setting regulator, it has communicated very clearly that its focus is on fair value, particularly as this sector, has a direct link to the value of returns on investment and therefore consumer outcomes.

At BDO, we have seen this sector has changed its approach over the last 18 months as the Consumer Duty has become more embedded. Firms are looking more closely at cost and profitability drivers with a much deeper understanding of the financial dynamics of the wealth and personal finance businesses. The quality of fair value assessments has matured and is proving a valuable tool for decision makers. A robust and thought through methodology is critical, as is evidencing decisions made on price and value.

Industry consolidation

Consolidation remains a hot topic and one very much on the FCA’s agenda, with a multi-firm review planned The market for personal advice is in a period of change with the entry of Private Equity looking to invest, and the need for the market to consolidate and professionalise in a way that increases standards and investment opportunities for consumers. The FCA is focused on the consumer outcomes, including ensuring that consolidation that moves consumers from existing to new investment portfolios, can be fully justified as in the consumers’ best interest. Conflicts of interest between consolidators and consumers require careful management, as well as incentive arrangements designed for adviser succession planning and exits. Governance structures should recognise conflicts and put in place safeguards. Second and third lines should monitor conflicts through the outcomes delivered to consumers. This requires a strong and independent second and third line, as well as a Board that can have an open conversation about conflicts and consumer outcomes.

The Consumer Duty transposed specific obligations on both seller and buyer with respect to due diligence, particularly in respect of product books. Adequate due diligence is also a means to identify potential risks and issues that may be inherited. It is likely that the FCA will have an increased interest during Change in Control notifications as to the diligence performed and planned integration.

Firms are also reminded that the FCA encourages sellers to perform diligence to ensure buying firms can provide the same level of ongoing service.

Therefore, similar to how BDO provide regulatory due diligence services, we recommend firms to consider diligence scopes, the integration and overall transaction process with a Consumer Duty lens applied.???

If you would like to discuss any of these issues, please contact us. Richard Barnwell [email protected]; Lucy Gallagher [email protected] or Alison Barker [email protected]

BDO UK LLP is the 5th largest tax, audit, and advisory firm in the UK. The BDO financial services advisory practice is a team of over 180 specialists, including ex-regulators and people who have held senior positions in regulated firms. This experience helps financial services clients to understand the impact of regulation and mitigate risk.