Keeping pace with Regulation – what has changed in the last two years - Investment and Pension firms

Our October Compliance Clinic will focus on FCA expectations around recruitment and ongoing supervision, particularly for firms with or firms looking to add Appointed Representatives (ARs).

Book your place on our next clinic here.

Today's regulatory environment is characterised not simply by new rules, but by a fundamental shift in how the Financial Conduct Authority supervises firms.  

The regulator is less focused on whether firms can point to compliance with individual requirements and more interested in the outcomes they deliver, the governance they can evidence and the data that supports their claims. 

How has regulation changed? 

The most significant change has been the move from rules-based compliance towards outcomes-based supervision, embodied by the Consumer Duty. Firms still need clear processes, documented controls and robust governance, but these are now only part of the picture.  

The expectation is that firms use management information to monitor outcomes.  Where the data suggests an issue, firms are expected to investigate, act and record the rationale for the decisions they take. 

We are also in a period where the regulator is actively looking to reduce unnecessary regulatory burden, again, enabled in part by the shift to outcomes-based regulation. 

Firms should be alert to the areas where their own processes can be simplified, streamlined or better aligned to the outcomes they are trying to achieve. That marks a departure from the historic assumption that regulation only ever moves in one direction. 

The FCA as a data-led regulator 

The FCA is increasingly a data-led regulator. Recent supervisory engagement, including the Section 165 financial adviser information request last year, sector-wide surveys such as the retirement income advice review, shows the FCA using data to identify trends, compare firms with peers and determine where further scrutiny may be required. The FCA is now better able to spot inconsistencies, outliers and gaps between what firms say they do and what their data suggests is happening. 

The FCA now has access to more information than ever before. Targeted surveys, regulatory returns, data feeds from third parties such as Companies House, FOS complaints data and wider market intelligence all contribute to an increasingly sophisticated picture of firms and sectors. 

On top of this, we are also seeing an increasing prevalence of targeted supervisory engagement, often with short response times and significant detail required. These requests are a way for the FCA to test whether firms are ready willing and organised.   

What specific areas of focus have we observed in the last two years? 

Consumer Duty 

We continue to see the FCA look to assess how firms have engaged with this new regulation. This includes supervisory requests, including for the firm's ongoing monitoring assessment and annual board reports, as well as follow up information requests and interviews.  

The Regulator expects firms to be ready with practical examples of Consumer Duty in action, e.g. where a firm has picked up and addressed a foreseeable harm or where a customer outcome led to a change to the firm’s advice service delivery. 

The firms best placed are those that can tell a clear story: what their data shows, what risks they identified, what actions they took, and how they know those actions improved customer outcomes. 

Retirement Income Advice 

The Regulator has told us that around 28 firms have been selected for desk-based reviews1.  The theme of assessing governance and advice quality in this area is likely continue.  The recent s165 survey, mentioned above, directly asked firms what changes they had made or were considering in light of the FCA Thematic Review publication.  It also highlighted that for 69% of clients2, retirement planning is their primary objective. This certainly points to continued regulatory focus in this area and firms should be ready for scrutiny.   

Notably, the FCA highlighted firms’ difficulties in providing accurate management information attracted attention, with the FCA noting instances where advice registers did not match the advice provided. Without reliable data, how can firms demonstrate that customers are receiving suitable outcomes? For many firms, this was a clear call to action to review the quality and accuracy of their advice registers. 

Ongoing Service Delivery 

The FCA’s focus on financial advisers’ ongoing services should come as no surprise. Again, the data shows what a significant role this plays in the sector with 88% of clients receiving ongoing advice3 and around 80% of revenue from adviser charges4.  

Again, we have seen the FCA carry out supervisory activity in this space in recent times.  While only a small number of firms received the information request, all firms regardless of size should take note. For many firms this should be seen as an opportunity to get on the front foot ahead of any further wider review that may arise.  We suggest that firms should carry out a health check of their ongoing service proposition and ask themselves some questions.   

• Do your customers understand the service, i.e. they know what is included, how this will be delivered, how frequently and how much they pay? 
• Have you carried out an assessment of need and an assessment of value? 
• Are you up to date with your reviews and do you have this MI available? 
• Do you monitor the quality of the ongoing advice delivered? 
• Do you have a disengagement policy?  When would you consider a refund?  
• What feedback have you collected on your ongoing service from clients (and staff)?  

The recent focus on Ongoing Service Delivery and Retirement Income Advice should not be viewed in isolation. Both sit within the bigger picture of Consumer Duty and the FCA’s expectation that firms can continually evidence good customer outcomes. 

Reducing the burden 

The FCA has increasingly signalled its intention to reduce unnecessary regulatory burden and support growth by making its rulebook more proportionate, outcomes-focused and easier for firms to navigate. This includes ongoing work to streamline regulatory reporting through the modernisation of data collection and the removal of duplicative information requests, helping firms spend less time on compliance administration and more time serving customers.

The FCA has also reviewed the Senior Managers & Certification Regime (SM&CR), introducing reforms designed to maintain accountability while reducing complexity, including simplifying certification requirements, reporting processes and senior manager approvals. In parallel, through the Advice Guidance Boundary Review, the FCA is seeking to simplify advice rules and create new forms of support, such simplified advice, and increased flexibility in relation to ongoing service. Whether these initiatives will have a material effect is still up for debate, and certainly when changing service levels this can bring with it some significant compliance considerations. 

What are the “must haves” in terms of data? 

These will differ depending on your firm’s resources and your activities, but we typically encourage firms to focus on the following core areas:  

Quality of advice – possibly the most crucial of all the metrics, if you can evidence delivery of good advice, you are in a very strong position to show good outcomes.   

Key performance indicators – monitoring areas such as source of business, product spread, agreed risk profiles and fees can help identify areas for greater scrutiny. 

Training and competence – closely following your firms T&C plan, checking staff remain competent and capable and focusing on good quality CPD will drive up standards. 

Ongoing service – evidence of delivery in line what has been promised and to sufficient quality. 

Complaints – while it is never pleasant to receive an expression of dissatisfaction, the process of investigating and responding should be seen as an opportunity to improve existing services. 

Feedback – both from clients and staff, this can be formal or informal, but it is important that it is recorded, offering valuable insight around service improvements and crucially consumer understanding. 

Vulnerable Customers – recognising signs of vulnerability, taking steps to adapt your service where practicable to provide additional support and recording and discussing experiences will enhance your firm and the perception of the sector. 

Communications – check that your communications are compliant and up to date.  For example, ensure websites contain up-to-date information, e.g. where an adviser has joined the firm, or by clearly signposting complaints procedures or scam awareness messages. 

Emerging challenge: outlier risk 

An emerging challenge is outlier risk and this likely to become an increasingly important theme for advice firms. In a data-led supervisory environment, firms should assume that the FCA will be looking for patterns that place a firm outside expected norms. 

Being an outlier is not automatically a problem. A firm may have a legitimate and well-controlled business model that explains why its data differs from the market. The risk arises where a firm cannot explain the outlier position, has not identified it itself, or has failed to consider whether it creates a foreseeable harm. Firms should ask: what would our data say about us if the FCA looked at it in isolation, and could we explain it? 

Final thought 

Over the last two years, we have undoubtably noticed a change in the regulatory environment.  Whilst common themes remain, it's clear that Consumer Duty and the use of data are now central to successfully meeting the expectations of an increasingly sophisticated regulator, intent on more targeted rather than wholesale interventions. 

The firms best placed for the next phase looking forward will be those that can tell a clear story: what their data shows, what risks they identified, what actions they took, and how they know those actions improved customer outcomes.

 

Our October Compliance Clinic will focus on FCA expectations around recruitment and ongoing supervision, particularly for firms with or firms looking to add Appointed Representatives (ARs).

Book your place on our next clinic here.