IFA firms will have to dig deep into their pockets to integrate and apply the additional regulations and to survive in an ever increasingly restrictive market.
The pace of new regulations being announced for IFAs continues despite the economy and the drop in stock markets. IFA firms will have to dig deep into their pockets to integrate and apply the additional regulations and to survive in an ever increasingly restrictive market. The stakes remain high that more IFAs will be considering sell up.
We look at changes on the horizon for IFAs:
- Outcomes-based objectives
- Final salary pension scheme (Defined Benefit transfer)
- Increased compliance
- Agents and brokers fees
It is anticipated that for the remainder of 2020 and beyond, the UK will see a number of new rules designed to deliver better value for money with IFAs being required to demonstrate that good customer outcomes are core to everything they do.
Regulators are adopting a more outcomes-based approach to the conduct of regulation and supervision. The outcomes will be based on design, sale and distribution of financial services products and for customers with non-typical needs including those deemed to be vulnerable.
IFA fees under scrutiny
Firms need to ensure that excessive fees are not charged and that they can demonstrate fairness between the charges paid by retail and institutional investors and will be increasingly asked to justify fairness of their pricing decisions. Investment managers will also be required to publish their first assessments of the value their funds deliver.
Final salary pension scheme
Recently, the FCA took measures to address weaknesses in final salary pension scheme transfers (referred to as a defined benefit (DB) transfer).
As most IFAs receive payment by way of contingency charging, the FCA believes that the impact for IFAs for loss of revenue in DB transfer advice could be between £360m to £445m a year due to fewer consumers paying for unsuitable advice. This equates to each IFA firm losing in excess of £300,000 a year.
Each IFA firm can also expect to pay a one-off cost of approximately £35,300 to change its processes and upgrade its systems to fall in line with the FCA’s new rules.
The FCA visited IFA firms permitted to give DB transfer advice after its data analysis survey detected a large number of IFAs had given sub-standard advice by recommending customers to transfer their final salary pension to an alternative scheme when it may not have been in the best interests of the customer but ensured that the IFA received a payment for the recommendation.
In an attempt to improve standards in the market, the FCA’s findings recently published outline its ban on contingent charging on DB transfers. Contingent charging, used by most IFAs, is where the customer pays nothing for advice received unless the recommendation is to transfer out of the final salary pension scheme. If a customer accepts the advice and it is then implemented by the IFA the cost of the advice is deducted from the pension fund after the transfer takes place.
The ban on contingent charging on DB transfers will take effect from 1st October 2020. It is expected that there will be some ‘carve outs’ in the rules to charging meaning that contingent charging will still be allowed for those whose health means that they will have a limited life expectancy or for people in serious financial difficulty.
As a result of the impending ban on contingent charging and the FCA’s targeted supervisory work into DB transfer advice has resulted in over 700 IFAs cancelling their permission previously granted by the FCA to provide pension transfer advice to customers.
Increased compliance for IFAs
Two new measures are being introduced which will add to the compliance burden for IFAs.
Environmental social and governance
The European Commission in conjunction with the European Securities and Markets Authority has also proposed changes to the Mifid II rules to bring financial advice firms into line with the European Union’s climate action plan. The financial services watchdog estimates that advisers will face one-off governance and IT project costs of £68.2m and ongoing costs of up to £500,000 each year. The FCA expects that £5m of this cost will fall on smaller IFA firms.
IFAs will now need to start thinking about implementing an Environmental Social and Governance (ESG) process that goes beyond a simple tick box exercise before the proposed regulations go through in 2021.
Knowledge base for IFAs
If Britain’s financial regulation remains in alignment with the EU, these changes could have a big impact on UK IFAs. The change will be felt particularly when advising clients on suitability and sustainability as IFAs will be expected to have the knowledge and policies to ensure that their clients receive suitable advice.
IFAs that fail to comply or who show no interest in ESG could be called to answer to the FCA which could ultimately mean revocation of its authority from the FCA.
AI Governance Risk Management
While the use of artificial intelligence (AI) is still fairly new in the financial services sector, it has the potential to make firms more efficient, competitive and profitable. However, use of AI models will not be risk adverse and while the current regulatory framework does not prevent the use of AI models, complying with governance and risk management requirements are usually more challenging in relation to stability and performance.
Firms will need to demonstrate that their AI model risk management framework has been enhanced to identify and manage risks such as data privacy.
With the proposed implementation by the FCA of operational and cyber resilience by the end of 2021, firms will need to demonstrate that they have considered all of the resilience risks they face and that they can be effectively managed as they upgrade their core systems.
Brokers and agents for IFA sales
The IFA world is different to other sectors as the agent’s fees are paid by the buyer. This means inevitably that the agent/broker is not on the seller’s side. Before you reach heads of terms signing stage it is worthwhile having a chat as we will be on your side. We have dealt with many IFA business sales and do have experience to bring.
We find that many IFAs are partnerships and buyers do not want to acquire a partnership structure. We help sellers of the IFA business find ways of unravelling the partnership or LLP to enable the sale to proceed.
Gannons has a team of experienced solicitors who specialise in selling IFA businesses. We are always on hand to discuss any queries or concerns that arise and work with you and your agent throughout the transaction process.
Senior associate solicitor in the company and commercial law team with over 25 years experience.