Speech by Nick Hulme, head of department, advisers, wealth and pensions, consumer investments, delivered at the Consumer Duty Alliance - Future Strategy for Personal Finance Professionals event in Birmingham.
Speaker: Nick Hulme, head of department, advisers, wealth and pensions, consumer investments
Event: Future Strategy for Personal Finance Professionals event
Delivered: 11 October 2024
Note: This is the speech as drafted and may differ from the delivered version.
Highlights
- We continue to focus on good client outcomes, taking a less prescriptive and, through the Consumer Duty, more outcomes-based approach to regulation.
- We want to give firms (from sole traders right up to the networks and nationals) the flexibility to innovate in service of their clients that fits their size and client base more easily.
- The strategy has 3 buckets – Reduce and prevent serious harm, test and monitor under the Consumer Duty and the Advice Guidance Boundary Review.
First of all, how fantastic is it to have so many of us here today! Must be the biggest such event since lockdown. My biggest thanks to Keith and the Consumer Duty Alliance.
And what a venue too. This is without doubt my motorbike-mad late Grandad’s idea of heaven. Even in his 80s he was never off his Honda Silver Dream.
But my inspiration for this speech about our new era supervisory strategy for the UK’s financial advice sector does not come from him, his motorbike, or his generation. Indeed, not even Gen X, Y or Z either.
As we rightly look to the future, it is my young son (as part of Gen Alpha) who is responsible for the title and thread of this speech.
Why? His favourite response to anything has become ’Daddy, it’s good to be different’. Now, that is usually deployed to try and convince me to let him and his sister eat chocolate for breakfast, lunch and dinner or for us to read the bedtime story upside down until 10pm rather than their normal bedtime.
But there is a deeper meaning to that ’it’s good to be different’ phrase for all of us sitting in this room as joint custodians of this great sector.
As we roll out the new supervisory strategy, and having spent a lot of time listening to you in formulating it first, this idea of doing things differently is one we are taking seriously. And something we want to do together with you.
After all, it is so important that we do, given our shared ambition to support millions of clients with the highest quality advice that helps them realise their life goals to the fullest - for themselves and their families.
Let me explain.
Firstly, it’s not just good to be different. We have to be different to how we have done things to date. We all have to. Our world is changing. From a regulatory perspective, we are already over a year on from the Consumer Duty, 9 years since Pension Freedoms, 11 years on from the Retail Distribution Review.
But more widely, we are all surrounded by ageing client and adviser populations, the transfer of wealth, a shift from defined benefit to defined contribution, younger generations engaging with advice in a wholly different way, geopolitical and climate uncertainty, markedly increased interest rates, industry consolidation (which I want to come back to) and artificial intelligence.
Secondly, notwithstanding the above, our overall regulatory mindset has had a dose of ’it’s good to be different’ too.
As our executive director Sarah Pritchard made clear 2 weeks ago, we continue to focus on good client outcomes, but we need to evolve the way in which we do this, taking a less prescriptive and, through the Duty, more outcomes-based approach to regulation.
To give firms (from sole traders right up to the networks and nationals) the flexibility to innovate in service of their clients that fits their size and client base more easily.
As Nikhil, our CEO, said: ’it will also require a willingness to take more risk and to experiment, accepting that not every idea will work’.
And to do all that, it requires open and frank conversations with you on risk and how we balance that altogether. And so in that ’it’s good to be different’ vein, we are coming to you more at events like these to do just that. Much much more.
To illustrate, in the 2 previous years, we attended 29 industry events. This year alone, 30 events so far, with 10 more planned. We are heading around the country to where you are all based. In person, face to face. All day.
And like today, it won’t just be a speech. There are interactive Chatham House breakout sessions and teach-ins – some hosted by the FCA – to get your feedback on what is and isn’t working. You all live day to day navigating our rules and guidance so are well-placed to help identify how they could work more effectively.
Any views we will channel into our local supervisory approach and the FCA’s new Call for Input (which closes on 31 October 2024). This is the formal mechanism seeking to take tangible action on harnessing the potential of an outcomes-based approach, like removing duplication or the need for rule simplification.
We are committing to these interactions because it is so important to ensure that we know where you are at and you know where we are at on an ongoing basis, sharing intel, ideas and data in the process.
To ensure our 3 goals are your goals, your priorities are our priorities. This strategy is not just ours. It’s yours too.
To that end, it is also no coincidence that sector sustainability is at the top and middle of the infographic issued alongside the strategy letter this week. That is also different.
So, let me turn to the substance of our strategy and how we intend to do our bit in achieving those shared goals. It follows from the same forward-looking mindset and need to be different.
Three buckets:
- Reduce and prevent serious harm
- Test and monitor under the Consumer Duty
- Advice Guidance Boundary Review
I will take each bucket in turn.
Reduce and prevent serious harm
There are 4 parts.
Retirement income
We all want to ensure that clients are getting the right advice when they are reaching the point in their working lives where they want to wind down or stop altogether. These people will have worked, and saved, for years to afford a deserved retirement that suits their needs.
And our collective job is to help them achieve this. Retirement income advice is so critical and where advisers can add huge value.
Now we have completed our thematic review (and please read if not already) and shared our good practice and ’even better ifs’, we are carrying out further supervisory work with a number of firms.
We will challenge with formal and informal tools to take action where there is identified harm but also commit in H1 2025 to share further best practice in due course.
Ongoing advice
The same is true for ongoing advice. We are concerned that some firms may not be taking into account the costs of these services and the impact this then has on reducing returns and ability to realise client goals. We are also concerned that some clients are being charged for services not delivered.
This is important because 90% of new clients are placed into such arrangements. We also know how important ongoing advice is for the sector given it is 80% of all advice revenue, up from 60% in 2016.
Put simply, where clients are placed into and paying for an ongoing service, we want to ensure they are receiving a good service in their interests. And if they are not, or an ongoing service isn’t appropriate firms should deal with this proactively.
As you all know, we wrote to larger firms earlier this year requesting information about ongoing advice delivery. This work is continuing and I'm afraid I can’t share much more on this today. However, I promise we will provide an update on our findings and next steps soon.
Capital deduction for redress: Polluter Pays
The third area of focus under 'Reduce and prevent serious harm' is a really important one for sector sustainability, fairness and good client outcomes.
Year on year, the FSCS levy has reduced by a further £92m having reduced from £625m in 2022/23 to £270m in 2023/24. However, significant liabilities each year still fall to the levy. We totally get how frustrating the feeling of unfairness is when paying for other firm failures. We want to reduce this on a sustainable basis.
To that end, we expect to publish a Policy Statement by the end of the year for our capital deduction for redress proposals. Here, we want to make sure that firms (and their appointed representatives) who create liabilities are better able to pay them. And, should a firm fail, that there is more capital to go towards Financial Services Compensation Scheme (FSCS) recoveries.
A key point we heard in the feedback was the importance of the supervisory strategy to watch for non-compliance. Therefore, if implemented, this would also be accompanied by a data-led supervisory approach with ringfenced specialist staff.
This wouldn’t just be working with those firms who apply for the asset retention in the new framework to help them work through the payment of their redress liabilities.
Crucially, it would be continuously monitoring to identify and assertively hold to account any firm that seeks to avoid the new framework – either through attempted phoenixing, or not declaring the true position of liabilities.
And finally in this first section, consolidation.
Consolidation
Over the last 1 to 2 years we have all seen an increase in industry consolidation – the acquisition of firms or their assets into larger entities. It remains a popular conversation topic at events around the country.
We know that it can provide numerous benefits and we are agnostic to whether consolidation is a good or bad thing, just like we are with form of capital and control.
That said, we also know, that where consolidation takes place without the correct controls and governance and a focus on good outcomes, there is a potential for harm. For example, from poor transfer experience, fee layering, different client terms, insufficient suitability assessments. And that is why, given the marked increase in consolidation in this market, we will be taking a closer look at such firms.
A few points to flag. We expect firms to notify us of acquisitions or changes in control. If we are not, we will act. We also expect buying and selling firms undertake robust due diligence, to ensure good client outcomes are achieved. That there is clear Board level ownership and evidence of this. For example, who wears the client hat in signing off a deal and implementation plan.
We also expect firms to undertake robust stress testing of financial projections and hold sufficient financial resources. If an acquisition is debt-based, there should be an appropriate debt servicing plan that does not compromise short- and long-term client outcomes.
Test and monitor under Consumer Duty
The second strand of our new supervisory strategy will involve testing and monitoring under the Consumer Duty’s 4 outcomes.
Across our actions to date with small, medium and large firms, independent or restricted, I see our role here as one of ’nurture and challenge’ – which, incidentally, and carrying on the Gen Alpha theme, is also the motto of my son and daughter’s primary school.
’Nurture’ in the sense that we want to be a platform for sharing good practice to raise standards. You will have seen a number of examples recently across all 4 of the outcomes (price and value, client understanding, support and products and services) as well as more specific literature for the 450 principal firms with appointed representatives.
Furthermore, earlier this year, we took the decision to publish our own internal Retirement Income Advice suitability tool – in full – so you can now openly cross-compare for yourselves your firm’s advice standards to FCA tools.
And next year, we want to – with you – also look at what data needs could help us all in collectively achieving the 3 goals of the strategy.
We know how different and unique we are. We are the only organisation that goes across the entire sector. So let’s collectively leverage that through us facilitating an adviser survey to help firms benchmark relative to the market or be clearer on emerging trends. We have interactive sessions today to explore this point with you.
‘Challenge’, however, is where our supervision teams will be turning up when we become aware of client outcomes that don’t hit the mark. Vulnerability is a good recent case in point.
When that happens, we will be looking for tangible evidence to show how you will make changes over a reasonable timeframe to meet the Duty as well as what processes are in place to put right any wrongs.
To be clear, the Duty is not just met by firms writing more stuff down. One practical way to test yourselves in this space is through the thinking behind each firm’s annual report on the Duty which evaluates the outcomes received by clients each year.
This is not an attestation to us (although we may request it), nor a tick box. Completing this report each year should be seen as an opportunity for you to evaluate your processes, be self-critical, and make any changes.
We also completely get for small firms how an annual Board report is tricky in the absence of a Board. As with ’nurture’, pragmatism and proportionality will be the name of the game in our challenge, especially for smaller firms.
In this case, smaller firms should think about how you can bring independence and objectivity into the assessment, for example through a critical friend.
In summary, we will provide challenge and act assertively with bad actors where we are concerned there are bad and poorly evidenced outcomes. But, as we have begun to do in recent months, our role under the Duty will also nurture more and provide support in getting it right by sharing best practice (and I hope in time data as well) to raise standards overall.
Advice Guidance Boundary Review (AGBR)
Our third and final priority in the strategy is the Advice Guidance Boundary Review (AGBR). This is not something I will spend too much time on today given other recent speeches.
All I will say is that it is all about ensuring – in a commercially appealing way for firms – that clients get the help they want, when they need it and at a cost that is affordable.
Our previous Financial Lives survey identified only 8% taking advice. So there are great opportunities to support many more currently unsupported clients and close the advice gap, whilst not cannibalising the need for valuable, quality, full fat advice.
After all, while a client may not need a comprehensive assessment of their financial circumstances today, they may need this in the future and different forms of support can act as a stepping stone for this.
To help get us to those stepping stones, we appreciate that the line between advice and guidance needs to be less blurry for firms.
This joint Review (with the Treasury) is one we are excited about, covering 3 limbs.
Clarifying the boundary is the first – so firms can act without fear of unintentionally giving a personal recommendation.
Targeted support is the second, which is a clearer middle ground of support for clients that is ‘better, not best’ and for ’people like you’.
And finally, simplified advice. The idea of meeting the more basic one-off needs of mass market clients, perhaps specific to a point in time or a specific client need… and therefore can be delivered more cheaply.
A Consultation Paper will be out next year (focused on pensions) and a further CP on retail investments next year. In the meantime though, I urge you to all engage with it, its motives.
Don’t wait for it to land before taking further steps to unleash opportunity and reduce that advice gap.
Conclusion
As you can see, there are some building blocks that remain the same (continuing to be very assertive with bad actors, for one).
However, against the challenging backdrop of some major changing fundamentals, which bring risk but also opportunity, there is also a lot of ’different’ happening.
Through our concerted mindset shift on outcomes and pragmatism rather than prescription post the Duty, a willingness to take more risk and to experiment, to remove unnecessary burden through the Call for Input, to nurture more – through working on shared data needs and playing back best practice.
And importantly to talk together more in person at great events like these, which we really hope unleashes a new era of closer collaboration. Of innovation and firms doing things differently too.
By doing this, we can maximise our shared goals … so that, on one side clients of all wealth levels are able to make good investment decisions and do so empowered, understanding the risks and protection involved, whilst very much ensuring that a well-functioning financial advice sector is sustainable and supporting investment and growth.
So that is a lot of different too. And as we know from Gen Alpha (well at least my eldest boy), ’it's good to be different’.