When it comes to risky professions, financial advice may not be up there with fighting fire. But, with a regulator keen to ‘shoot first and ask questions later’, did giving advice just get ugly?
Financial services lawyer Simon Morris, of CMS Cameron McKenna, follows the vagaries of financial regulation closely. He believes, from a regulatory point of view, advisers are facing a “very harsh market”.
“Advisers are on notice that what they have coming is a very determined regulator. Being an adviser is a very high-risk occupation,” he said.
What is underpinning Morris’s view? A vicious triangle of regulatory action.
“Advisers face a three-sided attack. One, a very determined regulator, two, the creation of new concepts around suitability, and three, the challenges arising from the Retail Distribution Review (RDR),” said Morris.
According to the lawyer, the regulator is inventing new concepts of suitability to suit its stricter requirements, as demonstrated by its recent paper on how and when financial incentives could damage the advice process.
“The regulator has created a theology around suitability. It is now showcasing its power in this area, such as with the ban on recommending unregulated collective investment schemes to retail investors.”
Unlike the Financial Services Authority (FSA), the Financial Conduct Authority (FCA) will have specific powers to promote competition in the financial industry.
Morris says this new remit will especially impact on larger advice firms.
“If the FCA believes a firm is not value for money it could ask them to change their practises. This is immensely significant.”
By comparison, the onus will be on smaller firms to watch their advice-giving, he said.
But Morris believes the FCA will be looking across the whole chain of market participants in a more comprehensive way than the FSA.
“There is a very clear emphasis on the relationship between manufacturers and their distributors. The FCA is looking at all elements of the advice chain. Providers must train their distributors in light of this.”
For Morris, however, key to advisers’ success in the brave new post-RDR world will be the treating customers fairly (TCF) principles.
There are six TCF outcomes which the FSA, and soon the FCA, expects firms and individual advisers to adhere to (see box below).
Morris believes these outcomes will be “absolutely central” to the way in which the FCA acts.
“If I was an adviser and I only had to do one thing to protect my firm against the FCA, it would be checking I am meeting the TCF outcomes. If these are not being met, there needs to be change.”
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The FSA’s six treating customers fairly principles are…
2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly;
3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale;
4. Where consumers receive advice, the advice is suitable and takes account of their circumstances;
5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect;
6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
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