SM&CR is one of the biggest changes on the horizon for 2019 and could potentially cause a compliance headache for the advisory sector, particularly smaller firms. It’s important not to fall into the trap of believing it is simply a replacement for the Approved Persons Regime (APER). Its focus on governance, controls, culture and reporting goes beyond the existing requirements to drive better behaviours and ensure that all relevant staff are aware of how their actions can impact customer outcomes.
RDR Post-implementation review
In our view, neither the Retail Distribution Review (RDR) or the Financial Advice Markets Review (FAMR) have delivered the results we had hoped for. The planned post-implementation reviews may help sharpen the focus on product/service governance, but firm still need to be much more specific on their target market and proposition.
Given the recent Parliamentary investigation, we anticipate that the FCA may well re-revisit the continued appropriateness of contingent charging models (specifically in relation to DB transfers but potentially more broadly too) to determine whether there is evidence of consumer harm. Aligned to this, we also expect the regulator to examine the impact of RDR from a competition perspective and look at how the RDR has impacted both the supply and demand for advice – especially given how different the pension landscape looks since the introduction of the Pension Freedoms.
Finally, given the broader focus on value for money across the distribution chain, we expect that the FCA will seek to better understand the degree to which (and the degree to which client feel) current advice propositions deliver true value for money.
Suitability is never far from the FCA’s thoughts as it remains the largest inherent risk within the sector. The regulator will be re-running its suitability work later this year, not only to determine whether the industry’s disclosure practices have improved, but also undertaking specific work to target firms providing unsuitable advice on highly complex products.
Following the publication of the findings of its Assessing Suitability work, the FCA did say that is would not materially alter its supervisory approach as the changes were relatively small. Unless the regulator uncovers significant, widespread suitability failings, this position is likely to remain. Advisers should prepare for greater scrutiny of their disclosure practices and suitability reports as significant weaknesses were uncovered during its previous investigation. The regulator will expect to see evidence that firms have taken their previous findings on board and made changes to address any failings within their own practices.
That said, the FCA’s activity to assess the quality of DB transfer advice may temper the FCA’s optimism as the results were significantly poorer than the outcome of the first Assessing Suitability review. Therefore, this may result in a more focussed or nuanced approach to the Assessing Suitability II than we saw first time around.
Notwithstanding all the above, the FCA has flagged on numerous occasions the impact the Brexit is having on their resources. Therefore, depending on how Brexit plays out, there is a real risk (with the exception of SM&CR) that it will have an adverse impact on the associated timescales with these initiatives.
With all the regulatory activity scheduled for 2019, the FCA’s focus is clear; culture is the primary driver for managing conduct risk. However, advisers need be continually assessing whether they have a clearly defined target market and a clear understanding of their needs, while also offering products/services that intrinsically delivers value and balances the commercial interests of the firm with the interests of its clients.