The FCA's 'Portfolio Strategy' Letter 

On the 21st January, the FCA sent out one of its 'Dear CEO' letters, outlining its stance in relation to the 'portfolio' of firms that we fit into, based upon our "primary business model" (financial advisers).  This is ValidPath's only business model - we are 100% engaged in equipping financial advisers to deliver the best possible financial outcomes for your clients.  It is concerning, therefore, that the FCA says that it is "seeing an increasing number of cases where the actions of firms are resulting in significant harm to consumers' financial well-being".  If that statement does accurately reflect reality, then that would indeed be a considerable worry, as it suggests that, whatever it is that regulation purports to be doing for customers (we don't have 'consumers'), then very clearly it isn't working if the instances of contra-indications are on the increase. 

I'm going to summarise some of the main points from this 'Dear CEO' letter in a moment, but before I do it is worth emphasising what is, from our perspective, the main thrust of our own focus at ValidPath.  We have the best practice-management system available in the UK, which every Member Firm is required to use for every piece of regulated work.  We have the best due-diligence resources available in the UK, which every Adviser has access to.  Every Adviser also has access to the widest-range of financial diagnostic tools, including the most functional cashflow modeller (according to independent reviews) currently available in the UK.  We have an ethos which stresses the primary, overarching influence of what we might call the 'ethical stance'.  And we have one of the lowest-cost, most rigorously reviewed and backtested, risk-graded centralised investment propositions currently available in the UK.  One could go on and on, but I will cut to the chase:  given that essential infrastructure, I do not think it reasonable to expect that ValidPath advisers will produce anything less than the best financial outcomes for their clients.

In short, I think that the 'problem' with this marketplace is two-fold:

  1. A regulatory stance which treats 'customers' as 'consumers', thus weakening their intrinsic status, and denaturing the kinds of professional responsibility which would otherwise govern the relationship between 'adviser' and 'customer'; and,
  2. The kind of ambiguous, relativistic ethical stance which devalues the minimum acceptable treatment of customers, so that 'doing no harm' becomes the acceptable goal for advisers - and thus any weakness in the advice process generates an outcome inferior to that.
Now, onto the specific themes in the FCA's 'Dear CEO' letter...
 

(1) Assessing suitability of advice & disclosure

The FCA ran its 'Assessing Suitability Review' in 2017, and they have indicated that they're going to be carrying out further work ('Assessing Suitability Review 2').  ValidPath were heavily involved in that earlier review, and we were not entirely persuaded at the time that the FCA understood the questions it was asking, but nevertheless, we have been steadily working on a project to define more clearly what is expected when advisers establish what is 'suitable' or not.
 

(2) Defined Benefit Transfer Advice

This is clearly one of those issues which is not going to go away.  The FCA is not happy with the current state of the advisory marketplace, and it's going to be beefing up its supervisory work in this area.  In the 'Dear CEO' letter, it has used the opportunity to restress its default position:  "We expect you to start from the assumption that a pension transfer is not likely to be suitable for your client".  ValidPath Members will be aware that, over the last four years, we have put in a huge amount of effort to beefing up our advisory framework governing those professionals wishing to engage with this specialist area of advice.

Interestingly, one key issue which the FCA letter mentions is "Inadequate fact-finding".  I cannot think of an area of advice where meticulous fact-finding might be more important - and we would expect nothing less than a forensic attention to detail at all times.  No summaries.  No approximations.  No vague, ambiguous references to key details.

 

(3) Pensions & investment scams

You'd have to be permanently resident on the Planet Zog not to be aware of the current epidemic of scams, that has been decimating the personal wealth of the gullible.  Sometimes, one really does wonder about the capacity of individuals to obey highly suspect instructions from complete strangers over the phone, when they have clearly been extremely reticent about approaching an accredited and regulated financial adviser.  It's a funny old world.  The FCA's concerns relate to unauthorised introducers and lead-generators, inappropriate delegation of key regulated activities to third parties, inadequate due-diligence relating to investment products, and (in particular) the kinds of investments which contain non-standard assets, complex structures and which may involve an elevated likelihood of illiquidity.

It is also clear from the text of the letter, that the FCA expects Advisers to be active in protecting their own clients from fraudulent activity.  In our view, this would require:

  • Strong compliance with GDPR
  • An ongoing focus on anti-phishing provisions protecting your own email and internet functionalities
  • Cultivating staff awareness of the risks, and how clients might be affected
  • Working closely with clients, so that they are not inclined to respond positively to the widows of Nigerian Generals
  • Applying the highest standards of due-diligence in relation to any third parties you might work with
 

(4) Adequate financial resources

The FCA is concerned that some financial advisers may be operating without 'adequate' financial resources underpinning their activity.  It's worth remembering that capital adequacy is ValidPath's responsibility - and we have to manage our financial model in order to comply with the FCA's ever-more-demanding basis for the calculations.  But, given that absolute regulatory requirement,  Member Firms should not be at all surprised that we tend to keep a very close eye on how you are managing your own financial models - there is no such thing as 'magic money'.
 

(5) Speculative investments

The FCA seems proud of its recent ban on the marketing of speculative mini-bonds to retail customers.  We would have been deeply concerned had any ValidPath Member considered this to be a viable and responsible approach to assisting clients with their investing needs.  We would not approve a financial promotion for such a product, and the only 'speculative' solutions that we would entertain are designed for very specific purposes, and are aimed at the kinds of clients who have the kinds of tax-planning needs which persist after all the more regular solutions have been considered.

And just for the record, ValidPath were writing about our concerns in this area some twelve years ago...
 

A conclusion...

There's not a lot new in this 'Dear CEO' letter, but it does serve to re-emphasise the FCA's current focus.  We have used the overall layout of themes as a way of restating the many things we've already been telling our Members over a very protracted period of time.  And, by supplying links to the existing library of articles, we hope that you will find this a useful way of re-acquainting yourself with our consistent stance in these areas.  We expect to be writing more on this topic, notably about the ways in which we believe that the FCA is now actively moving to constrain the advice market.

 

Kevin Moss, 22/01/2020