The FCA is starting to build back after focusing on Brexit and Covid

4 min read 12 Oct 21

It’s safe to say that the combination of Brexit and Covid-19 have been somewhat ‘distracting’ for the regulator but there are definite signs of life emerging of late.

Let’s cast our minds back a moment to the 2021/22 Business Plan, when the FCA first set out an objective of “enabling consumers to make effective investment decisions”. Although the strategy for achieving this has still to be published in full during early 2022, more recently the regulator has also published a feedback statement to explain why the work is needed, and based on their own data and intelligence, how the investment market is currently working for consumers.

One thing is for certain - it’s a big old market out there. There are 3.2 million consumers[1] with some £314 billion in stocks & shares ISAs alone, and in 2020/21, 7.1 million new investment accounts were opened. These consumers are served by over 6000 investment firms, and 5805 financial adviser firms. On a less positive note, FSCS compensation for consumer investment redress is estimated to be £618 million for 2021/22, and investment scams are also an increasing problem, with on average £24,000 lost to scams between April 2020 and March 2021.

But it’s not just about dealing with the scammers. The FCA wants to see an investment market in which consumers can invest with confidence, understanding the risks they are taking and the regulatory protection in place. Indeed, in some cases the regulator is concerned that consumer harm is occurring as a result of consumers not taking the right action. There are 15.6 million UK adults with investible assets of £10,000 or more. Of these, 37% hold their assets entirely in cash, and a further 18% hold more than 75% in cash. Over time, these consumers are at risk of having the purchasing power of their money eroded by inflation. Furthermore, financial advice is not reaching all parts of the market. Half of UK adults with £10,000 or more of investible assets (around 8.4 million people) did not receive any formal support to help them make investment decisions over the last 12 months. Only 8% of UK adults received financial advice and only 1.3% of adults made use of online robo-advice.

So far there is probably very little that financial advisers won’t recognise or support. The real debate, at least for the financial adviser profession, is likely to occur around how appropriate consumer redress can be met by firms in a fair and sustainable way. The FCA has highlighted three areas it will be seeking improvements:

  • Addressing poor advice. This will take the form of ongoing supervision, reviews and where needed, enforcement action. Firms who seek to avoid these liabilities and “phoenix” back into the market will be tackled at the (re) authorisations stage.
  • Strengthening capital standards. Adviser firms pay redress from their own financial resources and via PII. However, capital set aside is often insufficient to pay for redress, with the minimum capital requirement for most adviser firms set at only £20,000. This compares to £66.7 million of redress paid in response to investment complaints (£1,172 per upheld complaint) in 2020. The FCA have committed to investigating whether higher capital limits could be used, for example, for firms giving advice in “high-risk areas”.
  • Reviewing FSCS funding. A discussion paper on this topic is due imminently, and at this stage it appears any changes will be focussed on potentially rethinking the FSCS protection for high-risk investments.

Combined with the Consumer Duty, this work has the feel of a regulator starting to find its momentum and get stuck back in again after the relative chaos of the last 24 months. As things progress, we’ll be sure to update you on the impacts for advisers and their customers.

[1] All data sourced from https://www.fca.org.uk/publications/corporate-documents/consumer-investments-strategy