Assessing the value of financial advice

Speech by Megan Butler, Director of Supervision - Investment, Wholesale and Specialists at the FCA, delivered to The Personal Investment Management and Financial Advice Association (PIMFA) in London.

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Speaker: Megan Butler, Director of Supervision - Investment, Wholesale and Specialists
Event: PIMFA Annual Summit, London
Delivered: 14 November 2017
Note: this is the speech as drafted and may differ from the delivered version


  • Financial advice and investment management is of unprecedented importance to society, now more than ever.
  • The FCA is particularly active in two key areas at present: defined benefit to defined contribution transfer advice and high risk investments.
  • Information sharing with industry is vital to the FCA, as the intelligence we receive helps define our work.

It is a pleasure to join you, and a privilege to speak at PIMFA’s inaugural annual conference.

For reasons I’ll explain very shortly, I don’t think it’s ever been more necessary to have a strong trade body representing wealth managers and advisers. So I’m delighted the Wealth Management Association (WMA) and Association of Professional Financial Advisors (APFA) have joined forces.

At last year’s WMA event I went through the reasons for the FCA’s asset management market study (limited price competition being one). And I will provide a recap on its progress later.

Financial advice is of unprecedented importance

But my primary focus today is on the growing importance of financial advice. I am conscious that we hear this a lot in the advice space nowadays, but I think it bears repeating that the policy changes we’ve seen around decumulation really are transformational for your profession.

Three years ago, people pretty much accepted that the purpose of their pension was as a replacement for working age income. There are any number of legitimate uses we can put our savings towards today. And I think we’d all agree that having alternatives is important.

But as Andrew Bailey put it in his Mansion House speech last month, flexibility and choice can also become ‘a companion of complexity’. So I don’t think there’s any doubt that the role of the financial adviser is today more important than ever.

I don’t think there’s any doubt that the role of the financial adviser is today more important than ever.


The simple fact is that without your guidance, without your expertise, an increasing number of people would find it difficult to make sense of their choices. And I think you can see that trend reflected in your industry stats, with invested assets reaching a record £884bn this year.

You won’t be surprised to hear then that I completely agree with Liz’s comments last week, after the Pensions Freedoms committee inquiry, that there’s a lot to be positive about for the future.

But I also agree with her that it is important for your stakeholders to better communicate the value of advice. And on this point, I specifically want to acknowledge your support on our Assessing Suitability Review (ASR) that the FCA published in May. 

As you probably know, the review focussed on advice in investments, pension accumulation and retirement outcomes. And we found suitable advice was dispensed in 93.1% of cases in 2015.

This is a significant endorsement of the standard of UK financial advice. And I hope it goes without saying that this is a positive result. But it does also pose an interesting policy challenge for us. Removing increasingly small - and therefore less visible - pockets of underperformance is not easy.

Defined Benefit (DB) to Defined Contribution (DC) schemes

How do we approach this?

The short answer is through a combination of FCA work, industry work and some combination of the two.

I’ll start with our role. But I want to preface my comments by explaining why the FCA is so interested in what is, after all, a very limited percentage of cases of advice going wrong. The first point to make here is that some client loss from weak advice will be small and contained.

But in other cases, the advice will be clearly very poor and ongoing. And the detriment very large for significant numbers of clients. Nor should we underestimate the damage that these instances cause to the public’s trust in finance.

Our answer to this challenge is, essentially, to concentrate on areas where instances of bad advice are, or are likely to be, much worse than the ASR benchmark results.

So for the moment, this means that we’re particularly active in two areas. DB-DC transfer advice, and high risk investments.

We have said before that the transfer of a pension saving from a DB to DC scheme is one of the most complex transactions an individual can undertake.

On the former, we have said before that the transfer of a pension saving from a DB to DC scheme is one of the most complex transactions an individual can undertake. There is a genuinely high degree of uncertainty around some of the key variables that drive outcomes.

In our supervision work, we have seen good practice and also seen bad practice. But it is fair to say that we have found higher levels of unsuitability and unacceptable disclosure than we expected. In our most recent work we found that transfer advice was suitable in only 47% of cases, unsuitable in 17% of cases and unclear in 36%. On top of this, we found that the destination funds chosen by advisers were suitable in just 35% of cases and unsuitable in 24%.

Now, I should immediately acknowledge that pension freedoms have led to circumstances where a transfer might be fully merited. But it is not massively controversial to say that for a lot of people, keeping their safeguarded income for life will be in their best interests.

Over the last two years, we’ve requested detailed information from 22 firms on their DB transfer business. We’ve since reviewed client files for 13 of those businesses and visited 12. As a result of which, four firms have chosen to stop advising on DB transfers.

What were the main issues we found? 

  • A number of firms were failing to obtain enough information about clients’ needs and personal circumstances.
  • A number were failing to consider the needs of the client alongside the client’s objectives when making a recommendation.
  • A number were making inadequate assessments of the risk a client was willing, and able to take, in relation to their pension benefits.

I need to stress though that the root cause of a lot of the issues we uncovered were related to poor business models. In particular, we found that some firms had so industrialised their DB transfer business, that they were no longer focused on their clients’ individual needs.

The important, and pretty simple point, is that it is essential that any advice you give is centred on meeting the best interests of clients. For this reason, we think it is right to widen out our DB to DC project work. I do though want to thank PIMFA members for their positive engagement with us on the issue.

High risk investments

On our second area of focus, high risk investments, you will have seen us issue a number of alerts over the last year. These have fallen into two broad topics. The first is warning of the dangers of working with unregulated introducer firms.

The third is warning of the risks that SIPP operators face from new pension scams. I want to raise two main issues here:

Firstly, I am very aware that this work has come at a cost to you in terms of data requests. The most recent example being October’s high risk investments project, which we sent to 152 advisory firms asking for details of the HRIs they’ve advised on.

I want to make it very clear that we do not dash off these requests lightly. In fact it’s quite the opposite. We are working hard to reduce the number of data gathering calls we do in areas like retail mediation activities.

We have also set up an Information Governance Board to challenge and manage ad hoc requests, as well as limit the burden on individual firms. Finally, we are employing increasingly sophisticated analytical models and designs so we can identify high risk firms, with less imposition on you.

I need to stress that the FCA’s use of data analysis is a key means by which we intend to manage those remaining pockets of poor advice. As such, we’ll continue to ask for data. I hope you will agree that better identification of poor firms is essential for public confidence and ultimately in all our interests.

The second point I want to make is on pension scams.

We now work closely with a number of agencies to deal with pension-related frauds. A collaboration that includes using cross-agency specialist teams to monitor, quantify and tackle a range of cases of systemic pension mis-selling and fraud.

We now work closely with a number of agencies to deal with pension-related frauds. A collaboration that includes using cross-agency specialist teams to monitor, quantify and tackle a range of cases of systemic pension mis-selling and fraud.

As you might imagine, we take this role extremely seriously. And we have continued our work on scams that target customers’ pensions. Since the start of 2016, 32 firms have chosen to stop providing advice, or have decided to limit their pension transfer activity.

But the consumer intelligence we collect is a lagging indicator. In other words, by the time we receive it, the damage is often done. So we rely very heavily on your expertise and understanding to protect your clients. And this brings me onto the second part of my remarks: your role in driving out poor performers in the market.

Whistleblowing and market intelligence

Let me come again to pension scams, and an appeal to you to please report all suspicious activity to our supervisors.

We treat the information you share with us in total confidence. I also need to stress that every piece of market intelligence is reviewed even if, for whatever reason, we can’t divulge how it is used.

Every piece of market intelligence is reviewed even if, for whatever reason, we can’t divulge how it is used.

And this takes me another, linked point: please report poor professional practice where you see it. I ask this of you in full knowledge that whistleblowing can take courage, and can create moral quandaries.

But a healthy reporting culture is absolutely integral to preventing things from going wrong. We can see this in industries like aviation, for example, which after a series of accidents in the 1970s encouraged staff to speak up without fear of reprisal. And we certainly believe it applies to professional advice, where the well-being of clients, and future clients is at stake.

So I am pleased that the FCA is on track to record a 5% increase in whistleblowing disclosures from financial advisers this year.

By way of background, the largest percentage of whistleblowing reports we receive in your industry – at 29% - are related to fitness and propriety issues.

The next largest – at 15% - are around both consumer detriment, as well as systems and controls issues.

As things stand though, we still see comparatively fewer whistleblowers coming forward from the advice market than we do in other sectors. This means people are – potentially – losing their savings as a result of entirely avoidable poor or dishonest advice.

So I want to offer assurance that we record all information you give us securely. We sanitise it to make sure our sources are not identifiable. And after that – and only after that – do we use it to help shape strategy, identify emerging risk and, where appropriate, to pursue a criminal or regulatory case.


First, I want to tackle MiFID II, which is obviously uppermost in a lot people’s minds at the moment, given that the implementation date of January 3 is just around the corner. And I want to start with product governance. As you know, we’ve had guidance around product governance in place for several years in the form of the Responsibilities of providers and distributors for the fair treatment of customers (RPPD).

But the new MiFID II product governance requirements will introduce stricter controls in certain areas. A good example being the identification of a so-called ‘negative target market’ - or customers for whom the product is not suitable.

Generally speaking, firms are required to assess their own target markets. Both to ensure board level accountability and to keep a check on whether products are working as intended.

But post-MiFID II, advisers will need to consider, among other things, the rules around information sharing between themselves, as distributors, and the manufacturers. For example, advisers will need to gather information from manufacturers on the products that they intend to advise on. They’ll also need to feed information back to manufacturers, so the manufacturers can review their products.

To support this to-and-fro of information, we think it would be useful for both parties to put pen to paper on contractual provisions for the exchange of data. But I should stress that our intention is to supervise the new provisions in a proportionate way. In other words, we will take into account the nature of the product, the service and the target market.

The other significant issue for advisers is, of course, MiFID’s new costs and disclosure requirements, which go some way beyond current requirements. Broadly speaking, I think we can all agree that the disclosure regime under the new requirements is probably not perfect. But I need to emphasise that we do see it as an important step in the right direction.

As complicated as it is to present advisory costs to clients, it is difficult to argue that people should not have the opportunity to understand the overall costs of investing.

That said, we know this is a very real challenge for you. Particularly given the tendency for people to discount tomorrow over today. The so-called Lamborghini preference. 

So let me just make two points very quickly.

Firstly, we believe there is a reasonable argument that the ‘10% depreciation’ reporting requirement in portfolio management, in retail transactions in leveraged financial instruments, and in contingent liability transactions, will help firms. In as much as it will give you better Management Information to avoid further losses.

Secondly, I need to stress that we still have no plans to propose a standardised format for firms’ point-of-sale, or post-sale disclosures. However, we will do everything we can to positively engage with you on any industry-led proposals for templates. I understand this is not a universally popular decision.

But when you step back and look at the feasibility of mandating a ‘one size fits all’ approach in a sector with so many business models, the logic unravels pretty quickly.

Nonetheless, I do want to assure you that we will continue to work very closely with you on this issue to find appropriate long term solutions.

Finally on MiFID II, let me offer a few words on Legal Entity Identifiers (LEI). Again, we understand that ‘no LEI, no trade’ on January 3 requires a big shift for the industry. So, I would like to thank you all for engaging on this issue – both as legal entities yourselves, and for those of you reporting your clients’ transactions.

We have seen a rapid uptick in the number of LEIs issued in the UK – now over 60,000. There is still a way to go across the whole market, but ut these are important signs of progress.


And on this point, I want to give a very quick progress report on the Asset management market study.

We consulted on the interim findings between November and February this year – and published our final report in June.

We’ve since received a lot of responses to our consultation paper, which included proposals in areas including:

  • independent directors on fund governance boards
  • a strengthened requirement for fund governance boards to act in the best interests of fund investors, and to explicitly consider value for money
  • an expectation that boards will take action if they encounter poor fund performance
  • a requirement to return risk-free box profits to funds

In terms of next steps, we are reviewing responses to the paper now.

We also recently referred the investment consultancy sector to the Competition and Markets Authority (CMA). And in September, the CMA set out a structure for its investigation – posing three broad questions: Do

  • investment consultants have enough incentive to compete for clients?
  • conflicts of interest reduce the quality and value for money of services provided to customers?
  • barriers to entry and expansion mean there are fewer challengers to put competitive pressure on established investment consultants (causing harm to customers)?

Those submissions are now in and being looked at by the CMA. In the meantime, we will prepare a second consultation on transparency related points like benchmarking, performance reporting and, if needed, objectives and the all-in fee. 

We believe this adds up to a strong package of measures that will increase the value of your clients’ investments and, ultimately, reduce public harm.

Conclusion: the importance of working together

And on that note, I’d like to conclude my remarks by acknowledging the continued importance of engagement between regulators and firms.

Where we can work together to listen to concerns – particularly in areas like our FSCS consultation, MiFID II and the Senior Managers Regime – we will.

I know this can sound like cold comfort, but we genuinely believe that regulatory objectives, industry objectives and customer objectives are very closely aligned. In other words, we do not see this is not a zero-sum game. One side does not have to lose so that other wins.

And where we can work together – listen to concerns – particularly in areas like our FSCS consultation, MiFID II and the Senior Managers Regime – we will. I’d like to end by again thanking Liz and PIMFA for your support on key issues like suitability.