Wealth Sector Update September 2024

The FCA published its latest data for the number of skilled person reviews commissioned between January and March 2024. Out of twenty-seven reviews, eleven were in the Retail Investments, and Pensions, Savings and Retirement Income sectors.

Number of Skilled Persons Reports commissioned in Q4 2023/24 (January-March 2024) (fca.org.uk)

The FCA commentary notes “The increase in number of reviews commissioned reflects our strengthened regulatory oversight in the quality of advice provided to consumers in relation to their investments and pensions.”

Hot topics

Fair Value

FCA’s more intensive and intrusive approach to supervision was outlined in its Dear CEO letter to wealth management and stockbroking firms published on 8 November 2023. The overall message was that firms needed to think more carefully about consumer outcomes and whether they were providing the services consumers really need at a fair value. Ongoing Service charges have been in the spotlight. Ongoing service is often a bundle of benefits including platform access, reports, information, an annual review, and advice. The FCA focus has been the extent to which clients have received the services they have paid for or have received refunds.

The FCA has also published its latest data set from RMAR returns showing the profile of the wealth advice industry and ranges of fees and charges. retail-intermediary-market-2023-underlying-data.xlsx (live.com). For example, there are c. 4,500 independent adviser firms earning ￡3.6bn in fees (2023) and 632 Restricted advice firms earning ￡2.4bn in fees (2023). Ongoing service fees were approximately four times initial fees (2023, Facilitated Advice fees). The data also show the mean and median charges for initial and ongoing advice for independent and restricted advisers. These data give firms the opportunity to benchmark themselves and their own charging rates.

Fair Value Assessments have been some of the most complex areas of the Consumer Duty to implement. It requires a robust, detailed, and well evidenced methodology. Decisions should be clearly documented with supporting evidence. The FCA’s recently published Product Oversight and Governance thematic review gives an insight into expectations and is valuable read across. Findings include a lack of sufficiently detailed, robust, and evidenced Fair Value Assessments and a lack of action where value issues were identified.

Thematic Review 24/2: Product Oversight and Governance thematic review – General Insurance and Pure Protection (fca.org.uk)?

Retirement Income

The FCA published its’s thematic review about retirement income advice on 21st March, accompanied by a Dear CEO letter requesting firms to review how they provide this advice. The concurrent publication of a file assessment guide and cash modelling tool review help to give deeper insights into common issues FCA has identified. It is likely this will remain an area of scrutiny given Government focus on the role of the pensions and wealth sector in supporting better outcomes for consumers in retirement. A consultation on value for money assessments for defined contribution pensions has also been published and we will comment more on this shortly.

FCA asks Financial Advisers to review their processes in retirement income support | FCA.

Vulnerable Consumers

On 15th March, the FCA announced a review of firms’ treatment of consumers in vulnerable circumstances which will report by the end of this year. The FCA has been critical of the wealth management sectors engagement in vulnerable consumer guidance and identification of characteristics of vulnerability.

What are the practical steps firms can take?

• Complete a risk assessment against the points identified by the FCA’s various communications and plan further analysis or actions to mitigate risks.
• In responding to requests for information from the FCA, take time to ensure responses are accurate and complete. Identify potential areas for follow up questions and identify actions that could be taken.
• Consider whether existing MI or monitoring can identify where clients are misaligned to target markets or portfolios misaligned to clients’ objectives, needs and risk appetite.
• Review the framework and methodology for Fair Value Assessments. The FCA has issued several communications highlighting good practice and areas for improvement. A detailed level of analysis should look at costs of doing business, cost of future investment in, for example technology, price, and quantifiable consumer benefits, such as return.
• Ensure Fair Value Assessments are sufficiently granular to consider value for consumer cohorts with robust evidence and supporting documentation.
• For retirement income advice, review cash modelling tools against the FCA’s findings, as well as the standards of advice against the FCA’s file assessment guide. Significant changes may require a plan to reassess existing client portfolios to check these remain on track to deliver retirement goals.
• Review how vulnerable consumers are identified and supported. Look to other sectors and FCA’s good practice guides for different approaches to identification, support, monitoring, and measurement.
• Review management information, oversight, and governance arrangements. These should demonstrate root cause analysis and where value issues are identified, action is taken. The role of the second line should demonstrate robust challenge and adequate resource to test and assess management controls.

If you require support or would like to discuss with any of these topics, please speak to Richard Barnwell [email protected] or Lucy Gallagher [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.