Read the special edition TechTalk magazine: Changing Opportunities. Scottish Widows' Financial Planning team revisits the biggest industry changes, while Patrick Leavey from the Group Public Affairs division explores changes to the legislative landscape.
For this and more, visit the new Scottish Widows change hub
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The FCA has proposed to ban independent advisers and portfolio managers from accepting payments from third party firms on investment research.
According to the third FCA Mifid II consultation paper, published today, only certain research products such as commentary on market moves or company results may be exempt as “minor” and “non-monetary.”
Mifid II will be implemented in January 2018.
Meanwhile, the Mifid overhaul is set to cost firms $2.1bn (£1.6bn) for a technology update, according to an estimate by IHS Markit and Expand, a consultancy owned by the Boston Consulting Group.
The estimate includes the top 40 investment banks and top 400 asset-managers.
The FCA's suggested rules, which apply to equities as well as fixed income and other non-equity instruments, say that for a non-monetary benefit to qualify as “minor” requires “a consideration of the substance of its content” not how it's labeled or who produces it.
The FCA says: “It is for the receiving firm to make their own assessment, and if material does appear to be substantive, value-added research, and so is not minor in nature and scale, a firm will need to either pay for it under the new research requirements or not accept it.”
The FCA also want research costs to be “fixed, predictable cost” with no links to execution costs but be a “core management cost” or to be fully transparent to investors to eliminate any potential conflict of interest.
Ashurst regulatory lawyer Tim Cant says the new rule is “a significant” and, “unwelcome change” for many City firms.
He says: “The FCA has today signalled the end of CSA arrangements as we know them. Managers will now need to establish a single research payment account, and take control over, or outsource its operation.
“This will require significant changes to processes and legal arrangements, and puts the FCA at loggerheads with other European regulators, such as the AMF, who are taking a more flexible approach.”
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The £50,000 compensation limit for negligent advice should be scrapped, according to Financial Services Compensation Scheme chief executive Mark Neale.
In a blog this morning, Neale said that while instances of bad advice were “few and far between”, protection needed to be in line with retirement savings held in insurance products to give consumers more confidence in the system.
There is currently no limit to compensation available for retirement savings held in insurance products, allowing consumers to reclaim 100% of their losses if an insurer or provider goes bust.
However, if an advice firm enters administration, the lifeboat fund can only pay out a maximum of £50,000 to anyone mis-sold investments.
Neale says: “There is little logic to protecting retirement savings in insurance products without limit, but to restrict protection for mis-selling to £50,000. This is confusing for consumers and corrodes confidence.
“And it leaves consumers with retirement pots in excess of £50,000 in a quandary because it makes no sense to break the pot up for the purposes of seeking advice. An adviser needs to see the full picture.”
Neale adds: “I can see a sound case for harmonising retirement savings limits. This has the support of MPs with 60% supporting harmonisation according to our research.”
The way the FSCS is funded is currently under review, with a consultation paper due this Autumn. According to sources familiar with the review, options being discussed include capping fees for smaller firms, making providers contribute more and taking unregulated investments out of FSCS coverage.
Neale said that how negligent advice was protected should also feature in the review.
Neale says: “Instances of bad advice are few and far between, when they do occur they can have a devastating impact on retirement savings which take a lifetime to build up. We see that now with Sipp-related claims arising from advice to transfer retirement savings into a Sipp and then to invest in illiquid and risky assets.
“That's why I believe it is right to take a fresh look at the level of FSCS protection for negligent advice – currently £50,000 – as part of the current FCA review of our funding.”
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The Prudential Regulation Authority has not carried out any contingency planning over the long-term effects of Brexit.
Following a Freedom of Information request to the regulator, the PRA says it had conducted “significant contingency planning” for any market volatility that could have happened before, during, or in the immediate aftermath of the UK's vote to leave the EU.
But it admits it has not drawn up plans for the longer term impact of Brexit.
The PRA's initial planning included requesting information from firms on how they were set up to deal with risks over the referendum period, , allowing the Bank of England to assess what risks would apply to particular businesses.
The Bank of England's directors also met on 25 May, one month ahead of the referendum vote, and a new team was set up to coordinate Brexit work within the PRA.
The PRA said: “Over the referendum period, the PRA stepped up its regular contact with firms and established a small team to coordinate that work. That team maintained a 24-hour presence on the day of the vote. That team monitored market movements and any new developments relevant to the safety and soundness of PRA regulated firms.”
“Using Bank [of England]/PRA Stress Testing work the PRA has analysed the impact of any economic shock to the large UK banks' capital positions and they remain resilient”
The PRA says it has not yet carried out an analysis of how the UK's financial sector would cope under different models outside of the EU though.
It said: “Given the significant range of outcomes for the UK's ongoing relationship with the EU, the PRA has not carried out any contingency planning on these longer term outcomes.”
The PRA declined to comment on whether more analysis has since been carried out.
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Banks could give unbiased advice to help less “savvy” customers, according to FCA research.
In a research paper published last week, the regulator looked at how particular groups of consumers are affected by price discrimination in financial services.
It examines firms charging different prices to different individuals, resulting in some groups paying high mark-ups and cross-subsidising others.
The authors warn some consumers may not realise they are paying a higher mark-up, and argues banks could step in in these cases to provide advice from staff with “well-aligned incentives.”
The paper says: “Consumers may be less 'savvy' in different ways and sometimes in several ways.
“They may not have clarity regarding their future needs, and may therefore choose unsuitable insurance, savings or mortgage products, or even postpone a decision. If firms use complex pricing or complex terms, then if the costs accrue over time or the costs are hidden and consist in the loss of a possible gain, consumers may be unable to assess the cost of the product or the risks involved.
“In such situations, advice from the bank or building society providing the product may alleviate these problems to some extent, and advice from agents with well-aligned incentives will likely be helpful.”
The research did not examine whether or not bank charges are clear enough for those products or whether access to advice was sufficient.
Overall, the FCA's researchers found price discrimination does not necessarily warrant any regulatory intervention because it is often the result of a normal, competitive market.
The regulator says: “Before intervening, it is necessary to carefully identify the problem, as well as identify appropriate solutions.
“Badly designed or inappropriate regulatory interventions can lead to undesired or unintended consequences for consumers and competition.”
In the advice market, cross-subsidy can occur between high and low value clients, but also between clients who chose to purchase a product after free reviews and those who do not.
In a newsletter before the RDR, the regulator expressed concern that firms providing both products and advice were cross-subsidising the total cost of delivering advice to make advice charges appear artificially low.
The RDR requires larger firms that provide products as well as advice to set advice charges that are “reasonably representative” of the services offered, preventing firms cross-subsidising advice charges from profit from other parts of the business.
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Neptune's Chris Taylor explains why pressure is mounting on Abe and conviction in his strategy has strengthened.
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A simple demonstration of how to get quotes for your clients using Simply Class.
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