FCA sets out key harms and expectations for Financial Advisers and Intermediaries

The FCA wrote to firms in its “Financial Advisers and Intermediaries” portfolio in December to provide an update of its view of the key harms in the sector, its expectations of firms and a summary of the work it intends to do. The FCA emphasised that the misconduct of firms within the portfolio can cause significant and irreversible harm to consumers’ financial well-being and focused attention on the following key areas:

• Providing suitable advice is described as the mainstay of financial advice firms and the key focus for the FCA’s work. The FCA plans to concentrate in particular on retirement income advice over the next two years and continue to monitor the pension transfer market. In the FCA’s eyes, unsuitable advice is often driven by individual behaviours, misconduct, lack of integrity, unmanaged conflicts of interest and weak systems and controls that fail to provide adequate oversight. The FCA recommends that firms may consider regular, and potentially external, client file reviews to assess the quality of advice. Firms recommending a retirement strategy should not simply look to the immediate objectives of the client but ensure that sufficient consideration is given to potential changes in market conditions and consumer circumstances over the years.
• The FCA defines scams as investments that do not exist or that have no reasonable likelihood of a return due to excessive internal or inter-firm charges. Firms should always ensure they conduct robust due diligence on any recommended investment and should be particularly cautious where investment opportunities containing non-standard assets, illiquid investments or complex structures are being promoted by highly remunerated third parties. Firms are also reminded that they have a role in helping prevent scams by reporting suspicious products or activities to the FCA.
• The disorderly exit of firms from the market can also impact clients adversely, as can situations where firms knowingly or recklessly seek to leave behind liabilities and attempt to restart business elsewhere (described as “phoenixing”). The FCA makes clear that authorisation applications for phoenixed firms or for the approval of associated individuals will be subject to significant additional scrutiny and challenge. To ensure sufficient protection against unsuitable advice claims, firms should assess their risks in totality and hold sufficient financial resources to cover those risks and potential liabilities, which will often exceed specific minimum capital requirements set out in the FCA Handbook. The FCA plans to continue its review of the prudential regime for non-MiFID investment advisers, with further details expected in 2023.
• The FCA is concerned that consumers often do not receive value for money in the case of ongoing services. The forthcoming Consumer Duty is expected to be particularly relevant to ongoing services provided by financial advisers. Firms must ensure an ongoing service is appropriate for the client’s circumstances, is delivered within the terms of the agreement and is at a cost that is fair value. Firms are also advised to ensure consumers are receiving the appropriate ongoing communications regarding their investments, including suitability reports.
• In terms of other areas of interests, the FCA cited its 2022 Policy Statement on diversity and inclusion on company boards and executive management (PS22/3), confirming that diversity and inclusion will continue to be an area of focus, and emphasised the important role financial services and markets have in the transition to a more sustainable future, including with reference to the new Sustainability Disclosure Requirements proposals.

The letter also reminded firms within the portfolio to expect a separate, portfolio-specific communication in early 2023 further explaining the impact of the Consumer Duty and providing some examples of how it will apply in practice.