Wealth management - practical steps for a sector under the regulatory spotlight
Wealth management - practical steps for a sector under the regulatory spotlight
The wealth management sector remains under FCA scrutiny on several fronts including ongoing service, retirement income advice, treatment of vulnerable customers, and how the sector is squaring up to consumer duty outcomes. In this article we dive into the regulatory agenda and identify practical steps firms can take now to mitigate risk.
The concern is that industry practices have emerged where clients are charged an annual fixed fee for a suitability review of their investment portfolio, a service which may not provide value or in some cases firms may fail to deliver. While COBS 9A indicates a requirement for firms to review the ongoing suitability of their clients’ investment portfolio, the intention is that this review meets client’s needs and provides value. This may mean that the client has the option to decline a review, or that a less costly review might be adequate for lower risk portfolios.
Current poor practices for ongoing service are at odds with The Consumer Duty price and value outcome and cross-cutting rules. Charging customers for services they do not receive is ‘foreseeable harm’ and a failure ‘to act in good faith.’ Where a client is being charged without receiving a benefit the FCA expects firms to make a refund.
What actions can firms take in relation to ongoing service?
Later in March, the regulator issued a thematic review on retirement income advice, followed by a Dear CEO letter requesting firms to critically evaluate their approach. Against a backdrop of an aging population and pension freedoms, FCA’s concerns include poor cash flow modelling and poor advice leading to customers making decisions that affect their long-term financial security. To support firms the FCA have provided an assessment tool and guidance on cashflow modelling.
The message follows up on previous communications from FCA about the need to improve retirement income advice to consumers, identify and support vulnerable consumers, and think about the complexity and value of products and services.
We have extensive experience supporting wealth management firms like yours understand the impact of regulation and mitigate their risk.
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.
What is the current regulatory position on wealth management?
In 2023, the FCA signalled a more intensive approach to supervision of wealth management firms. On 8 November 2023, they sent a portfolio letter to wealth advisers and stockbrokers indicating that firms needed to think more carefully about consumer outcomes and provide services that consumers need at fair value. This was followed in December by a detailed survey requesting information about business model, products, revenue, internal operations, remuneration, and staff turnover.What are the issues relating to ongoing service?
Pricing in relation to ‘ongoing service’ was first highlighted as an issue by the FCA in December 2022. On 15 February this year, they sent a request for information to financial advice to investigate this matter further.The concern is that industry practices have emerged where clients are charged an annual fixed fee for a suitability review of their investment portfolio, a service which may not provide value or in some cases firms may fail to deliver. While COBS 9A indicates a requirement for firms to review the ongoing suitability of their clients’ investment portfolio, the intention is that this review meets client’s needs and provides value. This may mean that the client has the option to decline a review, or that a less costly review might be adequate for lower risk portfolios.
Current poor practices for ongoing service are at odds with The Consumer Duty price and value outcome and cross-cutting rules. Charging customers for services they do not receive is ‘foreseeable harm’ and a failure ‘to act in good faith.’ Where a client is being charged without receiving a benefit the FCA expects firms to make a refund.
What actions can firms take in relation to ongoing service?
- Asses that annual suitability reviews meet regulatory requirements, are tailored to the client’s risk and investment profile, and represent fair value.
- Ensure contracts and communications clearly set out services, fees, charges, and refund policy.
- Ensure that controls are in place, and effectively operated, to monitor that clients receive the services they pay for and are refunded where not.
- Review whether clients in the past have been charged for ongoing services that they have not received and undertake appropriate remediation.
What are the issues relating to vulnerable customers and retirement income advice?
In addition to challenges in relation to ongoing service, the FCA has been critical of the wealth advisory sector’s engagement in vulnerable consumer guidance. On 15 March they announced that they would be looking into firms’ treatment of consumers in vulnerable circumstances with a report due by the end of this year. Some of the criticisms of the wealth sector have included a lack of identification of consumer vulnerability or assumptions about vulnerability in their client base.Later in March, the regulator issued a thematic review on retirement income advice, followed by a Dear CEO letter requesting firms to critically evaluate their approach. Against a backdrop of an aging population and pension freedoms, FCA’s concerns include poor cash flow modelling and poor advice leading to customers making decisions that affect their long-term financial security. To support firms the FCA have provided an assessment tool and guidance on cashflow modelling.
The message follows up on previous communications from FCA about the need to improve retirement income advice to consumers, identify and support vulnerable consumers, and think about the complexity and value of products and services.
What are the practical steps firms can take in response to regulatory requirements?
- Complete a risk and control assessment against the points identified by FCAs various communications. 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 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.
- 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, and measurement.
How we can help
If you require support or would like to discuss any of these matters, please contact Richard Barnwell.We have extensive experience supporting wealth management firms like yours understand the impact of regulation and mitigate their risk.
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.