Double bubble equals trouble

A lot of our recent articles have provided our views on what we see as a significant shift in the FCA’s stance and the tone of their language. Not because we do so for the fun of it, but because there has been a tangible shift.

As yet, the anticipated findings from the thematic review of Retirement Income Advice haven’t been published, but it won’t be long now and we expect the outcomes to look about as attractive as a bulldog chewing a wasp. Whilst the report is still in the pipeline, that doesn’t mean that the recent surge in output from the regulator has abated. Ooh no.

The FCA must really like CEOs, because they send so many communications out addressed to ‘Dear CEO’. The latest, which relates to the retention of interest earned on customers’ cash balances, can be found here and it reports that the 42 firms the FCA recently surveyed (who retain interest) collectively earned £74.3m in revenue from this practice. And that was for just one month! How about that for a nice little earner?

Not only do many of these firms pocket between 10% and 100% of the interest that those cash balances generate, but some even charge clients for the privilege of holding their cash too. At least Dick Turpin had the grace to wear a mask when he said “stand and deliver”.

The FCA describes this as ‘double dipping’, which is probably an apt title in the circumstances, because fundamentally, that’s exactly what it is.

It wasn’t me!

Don’t forget that the firms who recommended that their clients place their cash with these providers should probably have known that this was going on, so if they did, they’ve effectively condoned it, but if they didn’t, what does this say for their research and due diligence processes? How many of those who express their horror at these practices and engage in lots of finger pointing actually recommend these providers to their own clients?

If the platforms/providers who have pocketed all this interest do dive on their swords, will they consider refunding any of what they’ve already taken? Answers on a postcard please.

OK, the cat is out of the bag, the financial press will make the most of the shock/horror aspects and no doubt the keyboard warriors will be out there wading in with their comments, but did it escape anyone’s notice that Consumer Duty went live nearly five months ago? So could this the tip of the iceberg?

Fair value?

All firms were meant to have performed fair value assessments by 31st July, but how many actually did, and what did they look like for the firms surveyed here? Surely they’ll have some argument to justify their actions (would love to hear that rationale!), but in reality are these price and value assessments just like marking your own homework much of the time? Maybe this practice isn’t the only one where there could be questions raised.

There are firms out there operating white labelled platforms marketed to clients as the firm’s own, but in reality they’re purchased off the shelf and the firm pockets some bps as a result. Wonder if any of these ‘platforms’ also trouser some of the interest on cash? There are others with in-house investment solutions where the firm derives substantial benefits, so there are possibly more cases of double bubble out there than perhaps meet the eye.

We’re also aware of firms with clients holding substantial amounts of cash within investment bonds, yet they still apply ongoing advice charges. What for? You may well ask. It’s like asking a builder to construct a wall then them charging you an ongoing fee for the privilege of having the wall.

Anyone who logged in for the FCA’s Consumer Duty webinar on 6th December will have witnessed commentary that they regard taking ongoing advice fees and doing little or nothing for it as poor practice. It is, and there are words for taking money and doing nowt. How many firms still charge what they did pre-RDR (or more), yet all the client gets is a valuation and some market commentary? Yes, there are overheads but how many firms still have no idea what it costs them to deliver their services profitably?

Remember that fair value assessments should take account of ALL costs and retention of interest by a platform or product provider is effectively a cost to the client.

Perhaps what this really highlights is that despite Consumer Duty requiring firms to look at their business models (and to be fair, some have), many have simply continued to do exactly what they did beforehand and have merely paid nothing but lip service to price and value assessments. After all, this could affect revenue, so making changes would be like turkeys voting for Christmas wouldn’t it?

There are a lot of really good firms out there that genuinely look after their clients’ best interests, but as we can see, there are also some that just don’t.

In a Christmas panto the kids would all be yelling “they’re behind you!” The FCA are.


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Our View

We’ve said it before, but Consumer Duty is a big deal and the FCA is definitely moving up a gear with its commentary. It’s clear that they fully intend to back this up with action and firms that have done little or nothing apart from preparing an implementation plan that does little more than implement what they were already doing can expect some heat. From what we’re seeing, the FCA is also targeting firms that they previously have had no direct involvement with, so that perceived cloak of invisibility may soon disappear. The majority of the firms we work with do their utmost to get it right (some haven’t and we’re now trying to help them pick up the pieces), but so many more out there could be sleepwalking into problems they could easily avoid. If Santa brings some of these firms a nice little questionnaire or data request from the FCA it may not necessarily be the season to be jolly.

Action Required By You

If your firm hasn’t looked at its business model and performed a proper price and value assessment you need to do so. And soon. We’ve supported numerous firms with this and in many instances have actually helped them become more profitable. Speak to us if you want some help here. And get your skates on!
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About the Author

Paul has in-depth experience across a wide spectrum, having headed up compliance, T&C, monitoring, oversight and MLRO functions previously. He was also an IFA for some time so can see things from more than one angle.

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