The FCA’s Dear CEO Letter to financial advisers

On 21 January 2020, the FCA published a Dear CEO letter (the Letter) addressed to CEOs of firms categorised as financial advisers.

The Letter sets out FCA’s approach to tackling key areas of concern with financial advice firms and summarises the action it expects them to undertake. It is one of three Dear CEO letters published in quick succession by the FCA, the others being addressed to CEOs of firms in the FCA’s asset management and alternatives portfolios.

Please also see our summary of the asset management letter and the summary of the alternatives letter.

Financial advisers as a key FCA priority

The Letter emphasises that the FCA is seeing an increasing number of cases where the actions of financial advisers are resulting in "significant harm to consumers’ financial well-being".

As a result, the FCA regards the prevention of harm in the financial adviser sector as a key priority and has identified four ways in which consumers of financial advice may be harmed.

These are:

• receiving unsuitable advice for their needs and objectives
• falling victim to pension and investment scams
• not receiving redress as a result of the non-payment of FOS awards
  and/or failing firms being unable to compensate consumers
• paying excessive fees or charges for products and services

The Letter makes plain that firms can expect to see an increased focus on these areas as part of the FCA’s wider supervision of firms over the next two years.

The FCA expects CEOs to consider and discuss the contents of the Letter with their fellow directors and/or Board and agree what, if any, further action needs to be taken. Principal firms are also expected to share the contents of the letter with their appointed representatives.

FCA’s areas of concern

The FCA highlights seven areas where it wants financial advisers to take particular note of its concerns and, for each (with the exception of Brexit), suggests actions which firms should consider taking.

1. Assessing suitability of advice and disclosure

The market has changed significantly following the pension freedom reforms. As a result, the FCA is to carry out further work (its Assessing Suitability Review 2) on the suitability of advice and associated disclosure, assessing the outcomes consumers are receiving.

The review will focus on initial and ongoing advice to consumers on taking an income in retirement.

Action to take

Firms need to ensure:

• the advice they provide is suitable
• costs and charges are disclosed clearly
• they act in the best interests of their clients.

Conflicts of interest must be identified and where they cannot be prevented, disclosed and managed.

2. Defined benefit pension transfer advice

Despite the FCA’s prior warnings and the strengthening of rules around defined benefit (DB) pension transfer advice, it considers that too much advice is still not of an acceptable standard and is concerned that firms are recommending large numbers of consumers transfer out of their DB pension schemes despite the FCA’s view that such transfers are likely to be unsuitable for most clients.

The FCA will continue to focus on this area until it sees the quality of pension transfer advice rise to the standard of that of the wider advice market.

Finalised Handbook rules and guidance will be published in Q1 2020 following the FCA’s July 2019 consultation paper on proposals regarding DB pension transfer advice, including proposed changes to the charging models that firms use.

Action to take

The FCA’s advice to firms is to:

• start from the assumption that a pension transfer is not likely to be
  suitable for a client
• identify and manage the risks associated with DB transfer business,
  including any conflict of interest caused by their charging
  structures (both for advice on the decision to transfer and for any
  ongoing investment advice)
• ensure they have gathered all the information necessary to carry out
  appropriate pension transfer analysis and make a suitable
  recommendation
• ensure they have adequate resources (advisory, transfer specialist
  and compliance) for their business.

3. Pensions and investment scams

Noting that significant numbers of consumers are still the target of increasingly sophisticated scammers, the FCA is to continue to focus its intelligence and supervisory activities on ‘prompt and assertive’ action against firms and individuals who facilitate or participate in scams.

Action to take

Firms need to be aware of the current risks and to ensure that their advice processes and systems are robust enough to avoid them. The Letter also provides contact details which can be used for making a report in confidence and, if so desired, anonymously.

4. Adequate financial resources and professional indemnity insurance

The FCA’s work on DB pension transfer advice has shown that some financial advisers hold inadequate financial resources and/or professional indemnity insurance (PII) for the business activities they carry out.

The FCA will be focusing on whether financial advisers have adequate financial resources and PII as part of its ongoing supervisory work, including examining the steps which senior management has taken to maintain valid PII.

Action to take

Financial adviser firms that are Personal Investment Firms must comply with the financial resources requirements set out in Chapter 13 of the IPRU-INV sourcebook, including the requirement to maintain compliant PII for both past and current business.

Where adequate PII is not held, the firm should stop providing advice on relevant business lines until it can secure appropriate cover or risk being in breach of the FCA rules.

Where a firm does not have PII cover at all for certain types of business, it should not be advising on that business.

The Letter also notes that firms with permissible exclusions need to hold additional capital in line with FCA rules.

5. Ban on promotion of speculative mini-bonds to retail consumers

The Letter refers to the FCA’s decision to use its product intervention powers to ban the mass marketing of speculative mini-bonds to retail customers for 12 months from 1 January 2020 – during this time, the FCA will consult on whether to make permanent rules.

The Letter also highlights that the FCA has published guidance on its existing rules for firms which approve the financial promotions of unauthorised persons. See also our summary of the FCA’s Dear CEO letter of 11 April 2019.

Action to take

Firms should consider whether the steps they have taken in approving financial promotions in the past were sufficient to ensure they satisfied the FCA’s requirements. Approval should be withdrawn where a firm becomes aware that a financial promotion which it has approved does not comply.

Firms which have approved the financial promotions of unauthorised persons in the past 12 months, or intend to begin doing so, are asked to inform the FCA by emailing Section21Approval@fca.org.uk.

6. Senior Managers and Certification Regime (SMCR)

The SMCR was extended to most FCA-authorised solo-regulated firms, including financial advisers, on 9 December 2019. From the same date, the Approved Persons Regime (APR) ceased to apply to FSMA authorised firms – however, the provisions of the APR and the relevant APR-controlled functions still apply to appointed representatives.

The FCA will be assessing compliance with the new requirements as part of its ongoing supervisory work.

Action to take

Firms are expected to:

• ensure that Senior Managers have a clear understanding of their roles
  and responsibilities
• ensure that staff (including Senior Managers and certified staff)
  have the appropriate skills and capabilities
• consider how the regime might affect their governance.

Firms that are Principals remain responsible for ensuring that their appointed representatives and networks comply with our rules, including the APR and should have structures and processes in place to do this.

7. EU Withdrawal

Following the UK’s likely departure from the EU on 31 January 2020, an implementation period is due to operate until 31 December 2020, during which EU law would continue to apply in the UK and passporting would continue.

Firms are expected to consider how the end of the implementation period will affect them and their customers, and what action they may need to take to be ready for 1 January 2021.