FCA: Adviser charging an ‘emotive’ subject

The Financial Conduct Authority (FCA) has raised questions over adviser charging models, especially in decumulation, while speaking at Personal Finance Society’s annual conference in Birmingham on 28 November.

Debbie Gupta, director of life insurance and financial advice at the FCA, has said that she doesn’t expect advisers to be “charities”, but has asked them to be considerate of conflicts that may arise.

Gupta said: “Everyone should be paid a fair amount for the services that they provide, but we do expect you to consider the conflicts that will arise, including how you structure your charges to ensure this does not lead to consumers suffering harm.

“Take for example the charges on ongoing advice. Most advisers that we see are charging a percentage of the client’s assets and this structure works well for clients who are building their wealth.

“Is it the right structure for people who are withdrawing their assets? Each withdrawal reduces the level of fee you receive and over time that fee income can drop significantly.”

The human factor when being an adviser

At a time when accountants are playing more of an advisory role when working with clients, Gupta’s comments are particularly relevant. Technology has enabled many accountants to begin spending more time on advisory services but has also meant that there is a significant emphasis on data.

Gupta’s comments bring a timely reminder of the importance of the human side of working with clients and recognising that each case is different.

She added: “At the same time, client circumstances may be getting more complex – as they age, they become more vulnerable, they may be less able to visit you in your offices and they may need more care from you.

“We would be really concerned if long-standing clients were priced out of advice just at the point when they need you the most.

“After all, helping people make decisions on withdrawing assets for use in retirement is as essential as advising on how to invest those assets. So how does your charging structure work and is it future-proofed against that evolving market?”

The authority recently closed its consultation on contingent charging, which was opened when the FCA found a disproportionate number of customers were being advised to transfer out of defined benefit pension schemes.

However, critics of the FCA’s proposal have warned that a ban may not result in a higher quality of pension transfer advice.

Sharing market intelligence

While speaking at the conference, Gupta also admitted that the FCA does not do enough to share examples of bad practice with advisers, admitting that the watchdog is in a privileged position to see what this looks like and should be more transparent with its findings to the benefit of firms.

Gupta commented: “With many thousands of smaller firms [in the market] there is a practical challenge in rooting out poor practice in a sector that is so broad and so diverse.

“In some ways you don’t want to necessarily change the shape of that sector because access to advice is an increasingly important part of how retail consumers will access financial services and products.

“From our point of view, yes we are doing lots of work on rooting out bad practice, but I also think one of the things the regulator is privileged to see, in a slightly roundabout way, is what bad practice looks like.

“As we do this we observe and see how that harm is manifested. And that’s something that we don’t share enough.”

Gupta said that the FCA frequently saw firms failing to demonstrate that they know their clients well when giving retirement income advice.

“They give the impression the firm is just doing what is best for the commercial interests of the firm,” she said.

“We are seeing evidence of it every day where this is not playing out. Because this sector is evolving so rapidly and because the impact of changes are still playing out in the market it’s our job to help share that because we believe there are many more, not just the regulator, who have a vested interest in rooting out bad practice.”