18/01/2021

Simon Thomas

Senior Business Standards Technical Consultant

18 January 2021

Navigating the sea of regulatory change

Since the global financial crisis of 2008, there’s no doubt financial regulation has become more comprehensive and granular. Of course, this creates issues for financial advice firms. Last year Fundsnetwork found that 80% of advisers said the compliance burden and regulatory change were among their top three business challenges. 50% of advisers say it’s was their number one business challenge. A quick look at the headlines from 2020 shows there’s no sign of the burden diminishing any time soon. In fact, there is a growing fear, this is driving some advisers to leave the industry, at a time when we need them the most.

To help you navigate the sea of regulatory change Scott Stevens, Quilter Financial Planning’s Director of Adviser Recruitment & Acquisition, talks to Simon Thomas, Senior Business Standards Technical Consultant at Quilter Financial Planning, to see what the future has in store.

Scott: Simon, why have UK Financial advisers been subjected to so much regulatory change?

Simon: The short answer is that financial services is a highly regulated sector and as membership of the EU expanded so have European regulations dealing with less mature jurisdictions. The UK has not been immune to occasional blow ups and these can be the catalyst for more regulatory change as unfortunately, the regulators often try to solve the problem with more rules and regulations. Recent examples being SMCR (to address accountability), MIFID 2 dealing with transparency, and of course a series of initiatives to improve the quality of pension transfer advice.

Scott: We have a powerful regulator here in the UK. What changes might we see now we’ve left Europe and what impact might this have on UK Financial advisers?

Simon: In short, not much immediately, at least for UK clients, but there a few points worth covering.

  • Post Brexit we won’t see a bonfire of regulation.  There might now be some transposition from primary legislation to the rule book but expect no immediate change for most advisers in the UK dealing with UK clients.
  • I think the UK will choose to adopt many of the new European ESG rules that are coming in 2021. Although we’ve left the Treasury is bought into sustainable finance – hence the new Green Bond.
  • I also think we are seeing a growth in interest in new models for advisory firms. I’m referring here to the Initiative for ‘Financial Well Being’. This integrates financial coaching into the advice model that wraps around the planning, often using Cashflow modelling and finally the advice and its implementation.  I think this area will develop unaffected by Brexit.
  • Finally, we have seen pressure on platforms and asset management businesses to reduce costs.  I think advisers are in a difficult space here as many are seeing their regulatory costs rise, which will feed into higher fees and a potentially bigger advice gap which robo-advice doesn’t seem to be filling. 

So, advisers need to focus on what client’s value most about their adviser relationship.  This is often helping them stick to their plan and stay on track so they achieve their desired outcome. What Andy Hart of Maven Money calls having ‘Humans Under Management’ rather than ‘Assets under Management’. That may manifest in simpler propositions that clients understand, believe in, and can stick to. Dr. Moira Somers’ book ‘Advice that Sticks’ covers why people don’t do that, but also what strategies can be used to address it. It’s well worth reading. 

Scott: Talking of Financial Coaching, I can only see increasing focus from the FCA on vulnerability and how it’s identified, assessed and addressed? Is this your view and what might be in store for advisers in this often ‘grey’ space?

Simon: Its true, the FCA has the treatment of vulnerable customers very much on its mind and has recently issued another paper - GC20/3 - on this topic. However, it’s important not just to think of this in terms of the elderly.  Lots of people, will be vulnerable at some point in their lives. The FCA quotes a figure of 24.1 million people showing at least one characteristic of vulnerability. Under the current pandemic that’s now probably more. 

So, it’s about being able to recognise and respond appropriately to specific vulnerabilities and embed good practice in your business. Just have just produced some excellent material on this topic and the FCA have also done a short 3 minute video*.

Concerns are often raised about records concerning vulnerability. The FCA’s recent consultation has a useful appendix to the paper which provides more detail but emphasises that Data Protection is a matter principally for the ICO and the FCA would expect firms to comply with the law in this regard under its own rules and high level principles for business. Firms should review their understanding of special category data and perhaps check that their privacy notices are fit for purpose.

Scott: Retirement income is an area close to every advisers’ heart. With an ageing population, this is rapidly become the stalwart for many advisory practices. I believe there is a Suitability Review Version 2 due. What do you think this might entail for advisers?

Simon: The last industry wide suitability review looked at around 1,100 cases.  Larger firms will be asked to submit a number - perhaps a dozen or so, smaller firms, if chosen, perhaps one or two. 

There will be some hot spots certainly. ‘CIP Vs CRP’ – so the propositions. How client’s income needs are being identified and met.  If you read ‘GC20/1’ the FCA set out three categories of spending; essential, lifestyle and discretionary. They also measure the client’s capacity for loss by reference to the first two. How firms are using cash flow modelling in this space, particularly with regard to assumptions and stress testing. Whether firms have read across comments the FCA have made in respect of DB transfer advice and applied these to their retirement income advice.

This last point was made quite clear by Debbie Gupta of the FCA last year at the PFS National Conference. I would expect the FCA to gather data on what consumers are paying for ongoing services in decumulation and what services are being provided in exchange. Finally, they FCA may ask how clients in decumulation reacted to the recent market challenges and what advisers did in response.

Scott: ESG (environmental, social and governance) is an increasingly important area for advisers when recommending investment solutions. Do you think we’ll see any rule changes in this growing space?

Simon: Yes. There are extensions to MIFID II under the ‘Sustainable Finance Disclosure Regulations’ which are expected to come into force from March 2021. Although we’ve left the EU, the UK has signed up to the Paris climate change accords. You have also seen the chancellor announce the first Green Bond. So I think the treasury are probably on board with this and it is they who will direct the FCA in this regard. There are probably three things to call out:

There are many new terms underpinning ESG that advisers will need to start to understand.  PIMFA have written a guide to Sustainable Finance covering these and it’s around 30 pages of content alone. ESG rating methodologies don’t always approach things in the same way so you need to understand how they work. ESG is more nuanced than traditional ethical investment and businesses can score well in say Governance, but perhaps poorly in the environmental measure, so you need to know how they work.  On a positive note there are new tools and apps, such as the ECO Fund Market (which is free) to help advisers try and match client ESG preferences with available investments. I think there is now credible evidence to dismiss the myth of performance drag of ethical or ESG investment.  Recent research would seem to show that funds with higher ESG scores have in fact outperformed some of their lower scoring competitors.

Younger people are increasingly likely to be concerned about ESG, just look at Greta Thunberg. We have an aging population. The young will be inheriting from many of your current clients. Ensuring you engage with that next generation and demonstrating that you understand and can help address their concerns in this area is frankly going to help make your own business more sustainable. 

Scott: So, nothing about the need for an adviser’s business to be greener then?

Simon: No, more of a branding question, but improving your own green credentials wouldn’t hurt your credibility. You can look at providing PDF reports rather than printed, more virtual meetings, changes to your energy suppliers, more flexible working arrangements for staff and so on, all to reduce your carbon footprint. A couple of advisers I’ve met have traded their diesel BMWs for a hybrid or Tesla.

Scott: What are the other areas you think advisers will see greater focus and what can they do to prepare their business?

Simon: It’s the Financial Conduct Authority and conduct is where the focus is. We’ve had SMCR which is about holding people to account for their conduct and we’ve recently seen the FCA ban advisers and others for non-financial misconduct. Remember the guy who was fare dodging for years? You can see conduct issues as a thread running through much of their recent activity.

Where can they go next? The answer is ‘Duty of Care’. This has been delayed due to COVID and I think this will create broad new rules rather than guidance. It’s important because enforcement action can be taken for rule breaches but not for breaches of guidance. Firms have pushed back in their responses, given the existing codes of conduct from their professional bodies, but while they can take disciplinary action against misconduct they’re not acting in a supervisory capacity. The FCA’s consultation paper is expected in Q1 of 2021.

Scott: You mentioned value for money. As an industry this is continually questioned, and we have seen the impact this has had on fund charges. There was recent Lang Cat prediction around costs and charging models for advice and platforms and for those that look abroad to more punitive environments. In Australia advisers have to write to their clients every two years asking if they are still happy to pay for ongoing advice. What might advisers expect from our regulator in this area?

Simon: We already have an element of that with MIFID 2 and the costs and charges disclosure.  I don’t see yet that the FCA is quite ready to go this far.  However, they are interested in:

  • how ongoing services are being delivered,
  • are clients getting what was promised, and
  • are these services of value to the client, which is a question that goes back to RDR.  

‘PROD’ provided some new tools in the FCA supervisory and enforcement armoury under which firm propositions could be challenged. If you look at ‘PROD 3.3.11’ this says a firm should consider the impact of charges for the end client as part of its consideration of the target market.  Value for money is a key underlying theme and ‘PROD’ provides the FCA with a means to nudge the market to do better.

Scott: A really hot area at the moment is DB Pension Transfer business. Judging by the press coverage this area receives, it is both of real interest to advisers and a real worry. I believe the finalised guidance to ‘GC20/1’ is expected in Q1 2021. What do you think this might have in store for anyone who has written or is considering getting into providing advice in this area?

Simon: I don’t see that the FCA will change this radically.  I’d hope the FCA might include in the finalised guidance a few good and poor practice examples around the application of their new fees rules.  Frankly, it was a really good paper, a couple of years late in my view but very good.

The big takeaway for me from that paper was the fact that a client who wants a transfer is not the same as a client who needs a transfer. This means needs must be prioritised over wants. To get that right it’s essential to understand in detail the lifestyle clients expect to enjoy, and the spending patterns that go with it. You then must demonstrate how those needs are to be met. If the scheme can meet the needs, then there is going to have to be a compelling argument as to why a transfer is in the client’s best interests. Take a good look at the consumer page the FCA put up when it released the consultation, highlighting potential hallmarks of unsuitable advice such as over emphasis on death benefits and flexibility.

Alternatives need to be considered and advisers have to demonstrate clearly why a transfer is in the client’s best interests taking into account all the relevant circumstances. Remember the starting position remains that transfers are unsuitable for most people, so at least 51%.

*The FCA ‘Treating vulnerable customers fairly’ video

Scott Stevens is director of recruitment and acquisitions for Quilter Financial Planning.

Simon Thomas is a Senior Business Standards Technical Consultant for Quilter Financial Planning.

Notes to Editors

About Quilter plc:

Quilter plc is a leading wealth management business in the UK and internationally, helping to create prosperity for the generations of today and tomorrow.

Quilter plc oversees £95.3 billion in customer investments (as at 31 March 2020).

It has an adviser and customer offering spanning: financial advice; investment platforms; multi-asset investment solutions; and discretionary fund management.

The business is comprised of two segments: Advice and Wealth Management and Wealth Platforms.

Advice and Wealth Management encompasses the financial advice business, Quilter Financial Planning; the discretionary fund management business, Quilter Cheviot; and Quilter Investors, the Multi-asset investment solutions business.

Wealth Platforms includes Old Mutual Wealth UK platform and Quilter International, including AAM Advisory in Singapore.

The Old Mutual Wealth Heritage life assurance business was acquired by ReAssure Group Plc on 2 January 2020.

Since its IPO in June 2018, Quilter plc’s businesses have progressively rebranded to Quilter, as follows: 

  • Quilter Financial Planning (previously Intrinsic)
  • Quilter Private Client Advisers (previously Old Mutual Wealth Private Client Advisers)
  • Quilter Financial Advisers (previously Charles Derby Group)
  • Quilter Financial Adviser School
  • Quilter Cheviot
  • Quilter Investors
  • Old Mutual Wealth (becoming Quilter Investment Platform in 2020)
  • Quilter International (previously Old Mutual International)

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