A tough message from the FCA to financial advisers and investment intermediaries

FCA’s portfolio letter to financial advisers and investment intermediaries – a tough message to the private wealth sector

?

FCA released its most recent portfolio letter for the private wealth sector on 7th October. Some of the areas of focus are no surprise, however there is specific mention of the current trend in market consolidation. The letter is straight forward and clear. The FCA is assessing this market carefully and will intervene where it needs to. Portfolio Letter: FCA's expectations for financial advisers and investment intermediaries

The top risks are no surprise but the tone is clear and direct.

We are at a moment of societal shift. The FCA figures show over twenty-two million employees are in a workplace pension and by 2050, 25% of the UK population will be over 65. From a government perspective, the onus on managing a sustainable level of retirement income, is now for individuals and not the state to manage. An increasingly aging population with responsibility for managing their finances to enable sustainable retirement is a complex challenge and there is a clear need for an advice sector that serves these clients with the highest quality advice to support this. This is a pervasive theme in the Portfolio letter.

Income in retirement

The FCA’s thematic review of retirement income advice (TR24/1: Retirement income advice thematic review (fca.org.uk)) called out a number of areas for improvement: sustainable income strategies supported by robust cash flow modelling; improved methods to assess risk appetite; better ongoing services to ensure the income strategy remains sustainable; and a strong control framework to ensure standards are met. The FCA also published a retirement income advice assessment tool for firms to use under licence. https://www.fca.org.uk/firms/retirement-income-advice- Just to note, the FCA call out this tool as valuable for PII firms insuring liabilities of financial advisers and investment intermediaries.

The FCA plan to revisit this topic with further assessment work and a report in Q1 2025. That timetable indicates the work may already be underway. Compliance and Internal Audit functions should consider this topic in their plans for a full review.

Ongoing Service

The FCA note 90% of clients are placed into ongoing service contracts (OGS) and importantly, that the revenue stream from OGS has shifted from 60% in 2016 to 80% in 2023. The FCA is continuing its focus to ensure these services deliver fair value, are flexible to the clients’ circumstances, are delivered, and can be cancelled. These areas have bene a challenge for many firms and a key action will be for firms to review their offering and the controls around effective delivery.

Market consolidation and acquisitions

There is a high volume of consolidation activity in this market with older advisers who are looking to retire and sell their books and investors who see the future growth in this sector, plus the ongoing income streams, as significant investment opportunities. It is a perfect storm of willing buyers and willing sellers. However, the FCA letter provides a note of caution. Consolidation needs to put clients and their best interests firmly into the acquisition equation. Investor influence risks deals which make unsustainable demands for growth and profit. Buying client books without thorough due diligence risks unexpected liabilities, mismatched clients to firms’ target markets or those which expand faster than the infrastructure of the acquirer can support.

The focus for Boards and the second line should be to ask difficult questions about such acquisitions:

-?????? Is the firm ready and able to take on more advisers?

-?????? Is the target client book a good match?

-?????? What are the client’s best interests and how are they served?

-?????? What are the terms of the deal? Will those terms deliver increased pressures that put client best interests at risk?

-?????? Is there sufficient robust analysis and evidence upon which to make a decision?

The FCA has made it clear it will intervene where it sees an issue and it is likely all change in control applications in this sector will receive greater scrutiny. The message on reserving capital to pay redress liabilities underlines this as does its ongoing focus on holding senior individuals to account where it can.

If you would like to discuss any of these issues, please contact us. Richard Barnwell [email protected]; Chris Bellairs [email protected] Karuna Bhanderi [email protected] Lucy Gallagher [email protected]; 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.