What the Financial Conduct Authority’s latest Sector Views report on areas of potential consumer harm means for you and your clients.
From investment management, to pensions advice and insurance policies – here are seven key takeaways from the FCA’s 86-page Sector Views 2020 report, which highlights areas of potential detriment to consumers and how the City watchdog intends to continue to regulate these sectors of the financial services industry.
1) Investment products
The FCA report said harm in the investment management sector mainly comes from six areas. The regulator has stated it is “most concerned” about two: the pricing and quality of investment management products, and operational resilience.
The remaining four are: disorderly markets; market abuse; and pricing and quality of firstly, institutional intermediary services and secondly, custody and investment administration services.
According to the FCA, “there are many drivers that result in investors investing in poor value products, where they are either overpaying or holding investments that diverge from their stated objectives. Drivers of this harm range from consumers struggling to assess and compare fees and products to poor governance practices at asset managers.”
Also, while its work on Mifid II and the Priips regulation has gone some way to mitigate this by improving transparency, the FCA acknowledges problems persist.
Therefore advisers who can help clients unpick the various costs and charges, and help to recommend both the best product for their clients’ current and ongoing needs and demonstrate value for money, will be operating in line with the FCA’s work on improving investment outcomes for consumers.
Moreover, the regulator has pledged to continue looking into concerns that “asset managers, particularly small ones, could be overpaying for bundled custody and investment administration services because of poor practices in some areas of service provision, such as FX transactions”.
With environmental, social and governance issues coming increasingly to the fore, the FCA has stated it will be more closely involved in monitoring governance and the potential impact of ESG on investment sustainability.
2) High risk retail investments
Advisers should also take note of the FCA’s focus on high-risk investment products.
On page 60 of the report, it commented: “The most significant consumer harm has come directly from growing consumer exposure to investment risk. Some consumers have ended up in products that exposed them to more risk than they expected or can afford.”
While the focus has been on the products themselves, with debates focusing on whether to ban or restrict them, the regulator is increasingly turning its gaze upon financial advisers and intermediaries who distribute or recommend these products.
The report said: “The process through which these products are distributed, and the support network around it, has not always worked well enough to enable consumers to make good decisions.”
Work the FCA has been doing to force asset management firms to disclose their value assessments has already led to some companies reducing their fees. Earlier this week, Aviva announced it was reducing its fees following the publication of its value assessment.