What the FCA found when it did a Suitability Assessment of the IFA Sector in 2017

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The Independent Financial Advice (IFA) sector was given a clean bill of health by the FCA in May 2017. Or was it?

A suitability review of 1,142 separate pieces of advice given by 656 firms against the rules in the Conduct of Business sourcebook showed that in 93.1% of cases, advice provided was suitable.

Interestingly enough, and one that the regulator has now agreed, they used a simple balance of probabilities of extrapolation of the data in their assessments, across the industry. This does not mean that the processes used to arrive at the suitable advice were correct, simply that the advice provided was more than likely to be what the client should have been recommended.

You have to dig your way through appendix 1 to find that 481 of the 656 firms in the sample had a single file examined. The file was chosen randomly, from advice given in 2015. We are pretty sure if an IFA told the FCA that its own quality assurance consisted of one file it would get a sudden amount of regulatory attention.

What, if any, assurance can consumers understand from this? Simply that in 2015, 481 firms of IFAs gave a single good piece of advice. The advice in 2013 could have been terrible and 2014 may not be described in any positive way.

So the next question must be; how is this reflected within the industry?

In January 2017, the Financial Services Compensation Scheme (FSCS) issued a statement, announcing three supplementary levies for 2016/17, totaling ₤114mn. Its Chief Executive explained:

” We will ask life and pensions intermediaries to pay their share of an additional ₤ 36m to fund compensation for the high numbers of SIPP-related claims we are continuing to receive, but also need to trigger a cross subsidy for the first time. These claims relate to advice to switch pension funds into high risk investments. We previously flagged the potential for high costs here … And we currently expect a deficit of ₤ 15m on our home finance intermediation account due largely to the failure of one particular firm that gave bad advice to engage in risky property investments alongside mortgage advice.”

The State of Play

The FCA says everything is fine. The FSCS says it needs more money due to poor advice surrounding self-invested pension plans, and pension transfers. In 2017 alone, the FSCS declared 90 firms in default. A lot of these were IFAs whose professional indemnity insurance claims limit were exhausted, and who couldn’t fund the Financial Ombudsman Service’s awards.

If you were running an IFA business, would you be telling everyone that the FCA are happy with ALL advisers and their suitable advice, or would you keep quiet in case someone digs deeper and finds the methodology was questionable?

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