Retail Conduct Risk Outlook - IFAs, Mortgages and General Insurance Markets

At Insynergi we will work with you in order that your business is not only compliant today but that compliance becomes a profitable and commercial way of life. This includes ensuring you are up-to-date with the priority issues being considered by the FSA. In February 2011 the FSA published the Retail Conduct Risk Outlook (RCRO) which examines the risks facing firms today, as well as those that are emerging and potential risks that could develop.

Many of the risks arise from conduct of a firm but the RCRO also takes account of market conditions, new regulation and macroeconomics (which is the performance, structure, behaviour and decision making process of the economy).

Legislation coming into force at the end of 2012 is affecting all firms but additionally, there are "dominant themes" for consumers such as the requirement for both growth and protection from their investments at the same time, disposable income and uncertainty of employment.

The following is aimed at advisers in the IFA, General Insurance and Mortgage markets. It does not include details of issues identified in the banking sector. It is not intended to convey individual guidance for firms and is merely a synopsis of the information contained in the RCRO. Click here for the full FSA text.

Current Risks

The FSA are addressing issues of consumer detriment with unfair contract terms under Mortgages and how customers with mortgage arrears are treated by mortgage lenders.

New rules for handling Payment Protection Insurance (PPI) complaints have been published, although the outcome of the Judicial Review is still awaited. Good business sense should have dictated that all firms offering PPI for new customers have reviewed their sales process to ensure that there are no systemic issues of consumer detriment remaining in their sales process.

Structured Investments and Deposits should now be marketed correctly following the guidance published in 2009 as to the marketing and distribution of these products. Additionally, new sales should be individually suitable for the customer, demonstrating the 'needs circumstances and objectives' that are met. Advisers should clearly understand the products and their inherent risks and ensure that these are clearly communicated to customers.

Emerging Risks

The RCRO highlights the following areas where the FSA have found evidence of 'poor conduct in firms but little or no evidence yet of widespread consumer detriment'.

Business Strategy in the run up to RDR

The FSA are monitoring the behaviour of firms and those looking to maximise revenue in the interim by:

Trail commission being increased to ensure continued income at the end of 2011
Owners of firms ‘building up their book’ with higher levels of commission-based products to increase their appeal in selling the business
Products with high commissions e.g. investment bonds where sales can be commission driven

Network controls over ARs

Insufficient processing and resource for monitoring
Inadequate vetting conducted on incoming appointed representative

Using Platforms

Consultation is taking place to bring platforms in line with standards required by the RDR but in the meantime, concerns are that:

Suitability of platform investments is not always individual to each customer
Conflicts of interest may not be adequately managed
Whole of market not adequately considered – possibly leading to unsuitable advice
Charges or total costs are not always clear

Portfolio Advice Services, Discretionary Portfolio Management and Distributor Influenced Funds

Portfolio advice services are usually provided on an ongoing basis, as is Discretionary Portfolio Management

Systems, controls and monitoring may not be adjusted for the changing business models
Advisers may not be sufficiently competent
Possibility of unsuitable advice because of additional costs incurred by the customer

“DIFs are funds typically structured as Open Ended Investment Companies, (OEICs) where the distributor (usually an adviser firm) exerts a measure of control over the fund design and management”

DIFs can be structured so that the distributor has some control over the fund design and management causing a conflict of interest with regard to an administrative incentive
Charges are often high and can be unclear. Customers are often unsure of the exact service they are being charged and cannot assess whether it is value for money
Possible unsuitable advice or lack of key information being provided to the customer

Investment Risk Profiling

The FSA issued a guidance consultation in January 2011 on Assessing Suitability, which includes consideration as to the poor outcomes that can occur if firms do not adequately assess the risk that a customer is willing and able to accept. This includes the use of risk profiling and asset allocation tools. Poor outcomes can occur if firms do not:

Collect full information including capacity for loss (this is not the same as risk)
Identify customers who will be best served by cash deposits
Use robust processes to identify acceptable risk to a customer
Interpret customers responses correctly
Give clear descriptions or examples to clarify the risk the customer is willing and able to take

Firms’ reward policies and practices – control/risk of staff incentives

High pressure sales
The FSA are currently looking at sales incentives for in-house staff and whether they increase the potential for mis-selling. A report on findings will be issued later in 2011

Popularity of complex investment products

The FSA have concerns over the complexity of some products and how they are presented to and understood by customers, including:

Traded Life Policy Investments (TLPIs)
Exchange Trade Funds and products (ETFs)

Different risks apply to these different products, including actuarial, market, jurisdiction and counterparty to name a few. There are also differing levels of protection in terms of the FSCS.

Unregulated Collective Investment Schemes (UCIS)

As well as being incorrectly marketed ("UCIS cannot be promoted to the general public") these investments are being sold to customers when they aren't suitable or eligible.

Self Invested Personal Pension Plans (SIPPs)

Suitability of a SIPP will depend on many factors including whether the additional costs provide benefits; whether there is a need for alternative investment and flexibility which meet the customer's attitude to risk. SIPPs are increasingly used for underlying investments which may be complex, have higher risks and little protection such as the FSCS (e.g. UCIS).

Potential Concerns

The FSA have highlighted some risks that could potentially cause consumer detriment in the future and therefore firms should consider the points detailed:

Critical Illness Cover and other Pure Protection products

All firms selling these products should have received a' Dear Compliance Officer letter' in November 2010, alerting them to the findings from the ICOBS review in June 2010. As a result of this, firms should have reviewed sales procedures to ensure they meet the FSA principles and requirements of ICOBs.

Business model change following RDR

The FSA have a primary concern as to whether firms will be ready both in terms of the advisers having appropriate levels of qualification and changes to meet any new business model.

The changing business models may lead to a "risk of poor outcomes for customers" such as

advisers "charging fees contingent on a product sale"; charging ongoing fees regardless of whether products are sold are not, or "more expensive advisers may feel compelled to advise on sophisticated products or services as a way of justifying their higher fees.

Customer costs may increase even though there are no tangible benefits because advisers move to a portfolio advice service to justify ongoing fees/income. This can also mean unsuitable advice if the customer has no need for this service or the attitude to risk is not correctly assessed against the customer's need.

Firms must review their systems and controls under any new business model to ensure that they remain in line with industry risks and guidance.

Firms responses to other regulatory developments

Other regulatory developments that may give risk to additional risks (for IFAs, and Mortgage Brokers) which the FSA will monitor are:

Mortgage Market Review
Pensions Reform
UCITS IV

Tax changes and their implication for financial products

Tax changes such as increasing the rate of CGT for high rate tax payers should not be a catalyst for some advisers to consider higher risk investments for their customers purely for their tax status (e.g. Enterprise Incentive Schemes will not be suitable investments for all customers just because they are higher rate tax payers).

Insynergi brings you many years' of experience and expertise gained in the compliance operation of major financial services providers. We also understand what it is like working as a small business.

Our first step is always to understand your business. We will then tailor a compliance framework to your needs - one that fits with the way you lead and manage your business, leaving you to concentrate on what you do best - helping your client.

Contact us now to find out how Insynergi can help you improve your business quality, staff retention rates and customer satisfaction.

Insynergi (UK) Limited is a member of the Association of Professional Compliance Consultants (APCC) and the Financial Skills Partnership (FSP).