On the level

Rory Percival explores how the FCA’s focus is shifting towards professionalism at a firm level

You will be aware that, for many years, the Financial Conduct Authority (FCA) has focused on firms’ culture, wanting then to be client-centric and to “keep the client at the heart of the decision-making process”. This was always quite a vague term and related to the complex subject of treating customers fairly. In more recent years, the FCA has refined its view on what culture means somewhat and now there is a greater focus on firms’ governance as it is how a firm is run that will determine, in the end, the outcomes for clients.

As the FCA states in its 2018/2019 Business Plan: “We believe it is important that all firms, regardless of size, are well governed and that individuals are accountable for their actions. Firms should be able to show the effectiveness of their governance arrangements in identifying, managing and mitigating the risk of harm.”

This is a clear statement about the need for professionalism at a firm level.

Market study

It now seems clear that there will be a wide-ranging study of the advice market in 2019. The FCA undertakes market studies to meet its statutory objective of ensuring competition works in the interests of consumers. It has indicated that the market study will include a review of the effectiveness of the Retail Distribution Review (RDR) and an update on the Financial Advice Market Review (FAMR).

I expect the FCA to find a number of positives in the market, particularly high levels of suitable advice and extremely high customer satisfaction. However, it will inevitably find the advice market is not competitive – firms do not compete with each other, there is almost no correlation between price and demand and there is extensive price clustering (firms charging similar amounts) – which is indicative of a non-competitive market.

Over time, the FCA has effectively been raising the professionalism requirements of firms and this is set to continue

Where a market is competitive, it has the external challenge of the market to keep firms on their toes, ensuring that they continually strive to provide good value for money services in order to stay in business. Where you do not have a competitive market – as is the case with the advice market – you do not have this external challenge that forces firms to offer value for money.  

This will be a concern for the FCA – how can it ensure clients get good value for money services from advisers where there is not the external challenge of the market to ensure this happens? It cannot change the way the market works fundamentally so that it becomes a competitive market; this is beyond its powers. In my opinion, its main option is to look at the Product Intervention and Product Governance Sourcebook (PROD) as a way of internalising the challenge process to help ensure clients get value for money.

PROD

The Markets in Financial Instruments Directive II (MiFID) introduced a whole new handbook – known as PROD. It seems clear that many firms are still unaware of the existence of these new requirements, let alone compliant with it (I wrote about PROD in the winter 2017 edition of Personal Finance Professional).

The aim of the handbook is to ensure firms have good product governance. In advisory terms, this is referring to the approach to providing advice to clients, including the design and implementation of the firm’s centralised investment proposition, platform selection and initial and ongoing advisory services.

There are rules around understanding products and liaising with providers but there are also requirements on advisory firms to focus on their own proposition for clients. You must understand your client bank and design investment solutions, platforms and advisory services that work for these clients. This is a firm-level assessment of the client bank rather than giving suitable advice to individual clients (which clearly you must still do).

In practice, PROD involves a process that should result in internal challenge and better designed client propositions and value for money. It is a set of rules that puts the FCA’s vague notion of “keeping the client at the heart of your decision-making” into a formal process. Also, given the FCA’s focus on value for money, I strongly expect the FCA to look at how firms are meeting the PROD requirements after the market study demonstrates that the advice market is not competitive.

SM&CR

The Senior Managers and Certification Regime (SM&CR) is another example of the internalising of the challenge process and professionalism at a firm level. This comes into effect in December 2019 and brings with it a raft of new requirements. I will explore this subject in more detail in a future article but in summary, SM&CR seeks to get firms to take more responsibility for the way the firm is run and to have greater individual accountability among the senior managers within the firm.

The RDR brought in higher professionalism requirements for individual advisers. Over time, the FCA has effectively been raising the professionalism requirements of firms and this is set to continue.

Rory Percival of Rory Percival Training & Consultancy Ltd

Picture Credit | Shutterstock