We need to have a conversation about risk

Since the Brexit vote, advice businesses have lived with uncertainty about what the future regulatory regime will look like. Before the break, two documents were published that together help to clear away some of that doubt.

The first is the Treasury Committee’s report on The Future Framework for Regulation of Financial Services, which paves the way for a more nimble approach, with regulation 'owned' by the Financial Conduct Authority itself, rather than by the EU or the government.

The report preserves the independence of the regulator, ruling against the requirement for proposed regulation to be shown to the government before it is published for consultation.  

The second glimpse at the future comes from the FCA’s own 2021-22 business plan, which sets out the vision of a modern regulatory regime with data and technology at its heart.

For consumers, the FCA’s priority list is topped by a commitment to enable "effective financial decisions", supporting consumers to invest with confidence, understand the risks they are taking and be less vulnerable to harm from unsuitable investments.   

Handling risk

"I spent the first 20 minutes listening to him talk about the money his son has made on Bitcoin," an adviser friend told me recently, following a meeting with a client. Another friend tells me his barber spent the entire appointment trying to sell him what he promised was "the next big crypto".  

The regulator recognises that, in a low-return world, consumers may be drawn to higher-risk investments, including unregulated investments such as cryptocurrencies. It wants those who take on such risks to do so knowingly, and to understand that they should be prepared to lose all their money. 

At the other end of the spectrum, how many investors have failed to achieve their goals by adhering too tightly to the old adage that it is better to be safe than sorry?

The FCA wants those who can afford to take on risk to become more comfortable doing so. The objective is to see fewer people with £10,000 or more holding their savings in cash. 

The regulator views this as a balancing act: if consumers are supported in their understanding of risk and protected from risks they cannot afford, they will be less likely to avoid the risks that they can afford.

Advisers have an important role to play, both by steering their clients away from the latest get-rich-quick schemes and by helping their clients to feel comfortable with taking on appropriate risk to achieve their goals. 

After the initial Bitcoin chat, my adviser friend was able to refocus his client on his own circumstances, his portfolio and his risk preferences, which did not include gambling his retirement pot in an unregulated market. In the new regulatory regime and in today’s investment landscape, the ability to have an informed and engaged conversation about risk is as vital as it has ever been. 

Providing fair value

Also on the priority list for consumers is fair value in a digital age. In previous work, the FCA has flagged some areas in which it has concerns about fair value in the advice space specifically. One such area is clients all being charged the same, regardless of their circumstances.

Another is clients in drawdown being charged for ongoing advice, unless it is clearly in their interest. Businesses may benefit from looking at their own practices now and ensuring that they are providing fair value to get ahead of further regulatory work in this area. 

As technology makes practices more efficient, allowing advisers to service more clients more quickly through increased automation, it will also be important for businesses to articulate and demonstrate how they are delivering value.

If servicing clients is becoming cheaper, is that reflected in fees? Rather than seeing the productivity dividend from technology accrue to businesses alone, the FCA would like it to be shared with consumers. 

One way the FCA is seeking to enable effective decisions and promote fair value is by encouraging competition. In a recent survey, a number of advice businesses – including one in seven large businesses – told us that new entrants were a source of concern for the years ahead.

But by embracing the regulator’s support for technology-driven approaches and adapting working – and charging – models accordingly, businesses can position themselves to thrive in a more crowded marketplace.  

A nimbler regulator focused on fair value in a digital age poses both opportunities and challenges for adviser business models. As the clouds on the horizon clear, those who keep looking forward are best-placed to succeed.  

Ben Goss is chief executive of Dynamic Planner