The regulation of advisers: the FCA's promises for 2014

Chris Hannant APFA 22 November 2013


Chris Hannant, the director-general of the UK's Association of Professional Financial Advisers, enumerates the many small victories a resourceful campaigning group can achieve in the face of the revolution in financial advice that has swept his country.

Chris Hannant, the director-general of the UK's Association of Professional Financial Advisers, enumerates the many small victories a resourceful campaigning group can achieve in the face of the revolution in financial advice that has swept his country.

As we have approached the end of 2013, APFA has been reflecting on the changes that have come over the regulatory landscape during the year. Of particular note was the arrival of a new regulator and, following the culmination of many years’ work, the implementation of the Retail Distribution Review. Some current government policy initiatives are also having an effect on the advice landscape, particularly in the pensions and long-term care arenas.

Fresh promises, planned reviews

Let us turn first to the new regulator. Since its inception in April the Financial Conduct Authority has set out an interesting agenda that holds out the promise of better regulation. Greater transparency; more emphasis on markets that work rather than rule-making; measurable performance indicators; and, not least, better value for money. However, this has been promising talk and little else so far. The coming year will see whether the FCA can fulfil its promise. There are some positive signs on fees for investment intermediaries in the FCA’s recent consultation paper, although firms holding client money and assets may fare less well. There is also the welcome news that the National Audit Office is conducting a value-for-money review of the FCA – finally imposing some much-needed scrutiny on
regulatory costs.

The implementation of the RDR at the beginning of 2013 has been followed by much discussion about the effect it is having, both on the industry and on consumers. There has been a sharp reduction in the number of advisors since 2011, but APFA believes that we have yet to see all its repercussions and it will take some years to fully bed down. Next year will give us a better picture of its overall effect on business as we obtain a full year's data regarding profitability, turnover and numbers of clients. The FCA has promised to review the RDR two years after its starting date, so APFA is gathering evidence of its after-effects and is thinking of ways to use this evidence to influence the FCA’s thinking before it
commences its review.

The advisers of the future

The aim of the RDR was to improve investment advice for consumers. In the words of the old Financial Services Authority: "It is establishing a resilient, effective and attractive retail investment market that consumers can have confidence in and trust at a time when they need more help and advice than ever with their retirement and investment planning." Now that the review is over, higher professional standards and the elimination of (supposed) commission bias should be reducing the risks that consumers face. APFA therefore thinks the regulatory environment should now be made more conducive to advisers running their businesses. We are not suggesting a lowering of standards but we do think that more could be done to help firms grow, develop talent and encourage more young people to join the profession and become the advisers of the future. In line with its new operational 'competition' objective, i.e. that of "promoting effective competition in the interests of consumers," in its own words, we think the FCA should share these aims. It must recognise that a healthy number of advisers is good for consumers and that there are things that it can do to help this come to pass.

The regulatory dividend and the long-stop

This is why APFA has launched its campaign for a Regulatory Dividend. This is so-called because we feel that in return for the sacrifices that firms are making in terms of better professional provision of advice and lower revenues, they deserve something back from the regulator. In short, they deserve less scrutiny and a more 'light touch' to regulation.

The campaign is aimed at lowering the direct and indirect costs for an advisory business but not the standards of consumer protection. We believe the FCA could do much to help, especially in respect of reporting, fees and the introduction of a long stop. In ordinary law, there is a long-stop date for people's liability for their actions but this does not apply in the world of financial services regulation. We need to remedy this, and in doing so we need to evolve proportionate regulatory controls that ensure that the market for advice works well rather than suffocates.

We were therefore pleased when the FCA announced that it will be reviewing its data strategy, starting with a 'proof of concept' in the UK retail investment market (which includes advice for high-net-worth individuals) to demonstrate that the work is feasible and beneficial. APFA has already spoken to the FCA about this, emphasising the regulator's obligation to justify all the information it collects and shared its data across its whole organisation so that duplication does not occur.

The FCA could improve its regulatory reporting regime in a way that makes a significant difference to firms. The short timeframe within which firms must submit the data presents problems and APFA has suggested that submission 13 weeks from the end of the reporting period would be more appropriate. The frequency of reporting is also an issue for smaller firms – annual rather than six-monthly submissions should be sufficient for regulatory purposes for a sector that the FCA has described as 'low risk'. In addition, the level of information required is unnecessarily detailed for routine collection.

Some firms have also been rather concerned this year about proposals for changing the capital adequacy rules for personal investment firms which were due to take effect in December 2013. APFA raised concerns about the proposals when it met the FCA in the summer, so September’s announcement that the FCA was deferring implementation for two years was welcome. This delay will allow it to undertake a more fundamental review of its proposals and APFA will be talking to it at every step of the way.

A victory for common sense

News has just come in that a European Union proposal to cap the amounts that advisers can charge for their services has been withdrawn. The initiative formed part of a 'draft regulation on key information documents' for investment products (Packaged Retail Investment Products or PRIPS) that the EU's parliament was considering. We have been pressing members of that parliament hard to quash it, and thanks to our efforts it has now been withdrawn.

A cap on the amount that advisors can charge is tantamount to a form of price-control. History has shown that this does not work. Regulators ought to be promoting competition between financial advisors rather than fettering it with price controls that are bound to drive the number of advisers down. This latest development is therefore another victory for common sense.

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