FCA’s portfolio letters to financial advisers and investment intermediaries and other updates for asset managers

Financial Institutions 360 – Q3 2024: Asset Management update

Read other sections of this edition of the Financial Institutions 360:

• Regulatory update
• Consumer credit and mortgages update
• Enforcement and litigation case updates

Portfolio letter to SIPP Operators

On 4 November 2024 the FCA published a portfolio letter to SIPP Operators, setting out its key focus areas for the next year. This follows on from the FCA’s May 2023 portfolio letter, and the FCA notes that it has not seen sufficient progress from all firms to address its concerns set out in that letter. Points of interest:

• Total assets under administration are £184bn (up from £130bn in 2022) (this doesn’t include platform-based SIPPS which is about £204bn).
• There are approximately 800 open complaints at the FOS.
• The FCA is particularly concerned about the handling of pension scheme money and assets by some firms, the accuracy of firms’ books and records, and some firms’ implementation of the Consumer Duty.
• The FCA has reviewed 19 SIPP operators as part of their Consumer Duty pre- and post-implementation work, and sets out some of its concerns and expectations. For example:
  • Some operators did not understand their obligations arising from their role as distributors as well as manufacturers.
  • Some firms had not specified the target market for their products at a sufficiently granular level.
  • Some firms were assessing fair value through market comparisons, which was not sufficient.

Portfolio letter to financial advisers and investment intermediaries

On 7 October the FCA published a portfolio letter setting out its expectations for financial advisers and investment intermediaries. It says that 4.4m consumers paid for financial advice last year.

The FCA sets out its priorities for the next two years as follows:

1. Reduce and prevent serious harm: with a focus on retirement income advice, ongoing advice services, ensuring the “polluter pays”, and consolidation.
2. Monitor and test higher industry standards under the Consumer Duty: the FCA expects firms to be able to evidence that they have implemented the Duty and complies on an ongoing basis.
3. Enable more consumers to pursue their financial objectives through the Advice Guidance Boundary Review: the FCA encourages firms to actively engage with them on the review and consider the opportunities it may provide to better support their clients.

The FCA plans to achieve these priorities through increased industry engagement and collaboration, and a forward-looking and data-led approach (firms will be sent a survey next year).

Retirement income advice: the FCA intends to publish further commentary on the retirement income advice market in Q1 2025.

Ongoing advice: the FCA has found that 90% of new clients are placed into arrangements for ongoing advice. The proportion of advice revenue from this has risen from 60% in 2016 to 80% last year. The FCA wrote to some firms requesting information about their delivery of ongoing advice earlier this year and will provide a further update later this year.

Polluter pays: reiterates messages from December 2023 publication and notes the FCA will outline next steps on capital deduction for redress consultation before the end of the year.

Consolidation: notes increased consolidation and that the FCA will undertake multi-firm work to review consolidation within the market. Also sets out expectations of firms when acquiring or increasing.

Vulnerability in the wealth management sector

On 24 October 2024, Graeme Reynolds, Director of Competition at the FCA, gave a speech at the PIMFA Wealth Vulnerability event entitled “Vulnerability is not a buzzword”. In it, he sets out some useful tips for firms considering their treatment of customers with characteristics of vulnerability. The FCA will be looking at vulnerability again in 2025.

He made the following points of note:

• There are 4.5 million UK consumers with investible assets of £10,000 or more held mostly or entirely in cash.
• Vulnerability is not something technical or a box to be ticked – it is about things that could happen to anyone, including ill health, bereavement, and job loss. Firms need to be able to recognise the characteristics of vulnerability including the impact of an unexpected financial or emotional shock on their customers’ ability to make good decision.
• In 2022 FCA research showed that nearly a third of UK adults with £50k or more in investible assets had at least one characteristic of vulnerability.
• Firms that get it right:
  • Identify vulnerability.
  • Understand how their customers’ vulnerability characteristics will impact their needs, and that circumstances can change.
  • Provide support and adaptations to make those services work for their diverse customers’ needs, including ensuring that they have well trained, empathetic client service.
  • Monitor the outcomes for those customers to ensure they continually improve and evaluate their progress in supporting them. Firms should think pragmatically and proportionately about what a “good” customer outcome is for those using their service.
• Wealth management is an outlier in that there is a significant difference in vulnerability from the rest of the sector. In 2023, portfolio managers identified just 5% of their clients as having characteristics of vulnerability.
• Under the Consumer Duty, firms more remote from retail clients may have more limited obligations. But the design and value proposition for a product or service, and the information provided to ensure it is understood, can have a real impact on clients with characteristics of vulnerability.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2024