FCA sets out evolving approach to financial sector supervision under consumer duty

“This has significant implications not just for the financial advice sector, but for all regulated firms,” said Nicholas Kamlish, financial services specialist at Pinsent Masons.

As has been set out in the regulator’s most recent strategy and business plan, the FCA is “laser-focused” on reducing and preventing serious harm. To that end, the recent speech by Nick Hulme, head of the department for advisers, wealth and pensions, and consumer investments, highlighted that FCA supervision will continue looking to take action, for example with skilled person reviews or by seeking voluntary and own initiative requirements (VREQs and OIREQs) from firms, where harm is identified following thematic reviews.

A recent example was the review of retirement income, which noted that some advisers were failing to show they had considered the needs of their customers, especially vulnerable consumers, or provided the right information to support their customers to make informed decisions.

Kamlish said: “The FCA will not be slow to seek the provision of customer redress from, or take enforcement action against, firms which fail to address these points in a timely manner, with further publications on best practice in the retirement income sector expected in early 2025.”

Another area of focus is ongoing advice. Hulme noted that some firms were not taking into account the costs of these services, which are provided to 90% of new clients, and the impact this has on reducing returns and advisers’ ability to realise client goals. In some cases, clients were being charged for services not delivered. The FCA requested information earlier this year from the largest adviser firms about whether they had assessed their ongoing services in response to the consumer duty and whether they made any changes as a result. The FCA also sought data about clients which did not receive a review of the ongoing suitability of their advice when they had paid for ongoing advice.

Kamlish said: “A further update is expected shortly on the FCA’s work in this area, and this may well include market interventions or redress schemes to ensure fair value, as has been seen in the insurance sector. Firms can also expect an uptick in claims management companies and Financial Ombudsman Service claims for failure to provide ongoing advice.”

Anthony Harrison, financial services expert at Pinsent Masons, said: “While there is a definite suggestion in the speech that regulatory action may be taken in relation to areas like retirement income and ongoing advice, it can also be seen that the FCA is attempting to be clearer in its approach to regulation and supervision, with emphasis on educating and consulting with firms.”

For instance, there is an ongoing call for input on how the FCA Handbook could be streamlined following the implementation of the consumer duty. The FCA has also shared the tool it uses for assessing the suitability of retirement income advice given by firms.

Moreover, the speech contains some valuable pointers for firms being reviewed by FCA supervision in relation to the implementation of the duty. Firms will be expected to provide tangible evidence to show how they will make changes over a reasonable time frame to meet the duty. Firms will also be required to set out what processes are in place to put right any breaches, and provide thorough, independent and objective annual reports on the duty which evaluate the outcomes received by clients each year.

Harrison also noted: “Overall, Mr Hulme’s speech offers the message that, although regulatory action will be taken against ‘bad actors’, firms which are prepared to invest in compliance with the consumer duty will be afforded a degree of flexibility by FCA supervision. Advice firms with innovative business models can also look forward to reforms geared towards allowing them to provide more guidance, targeted support to classes of customers, and simplified advice to mass market clients, with consultations on the advice guidance boundary review for pensions and retail investments expected next year.”