Why Compliance with FCA Guidelines is Crucial for Financial Advisers

Amidst all the global economic uncertainty of the past several years, the United Kingdom (UK) is facing its fair share of financial woes. The Bank of England (BOE) recently raised interest rates to 5%, the highest they have been in 13 years, and there is persistent talk about the inevitability of a recession. Consumers are also facing a massive cost of living crisis, with many households battling to make ends meet. 

This economic uncertainty has increased pressure on financial services such as debit and credit cards, loans, pensions, and investments to deliver high-value offerings to consumers. In particular, investors are looking for guidance from financial advisors on how best to navigate these troubled times and preserve their wealth for both the short and long term. This, in turn, has put the conduct of financial entities back in the spotlight as regulating bodies fight to ensure that consumers are protected from any untoward or dishonest practices. 

One of the most important of these authorities is the FCA, an independent financial regulatory body that aims to maintain the integrity of the financial markets in the UK.  The FCA regulates over 50,000 financial firms in the UK, including prudential supervision of 48,000 of them. Firms and people operating in the financial industry must be registered by the FCA to carry out certain activities, and their conduct has to comply with the standards and regulations set out in the FCA Handbook.  

If they fail to meet these standards or violate any of the rules, the FCA has a range of enforcement powers at their disposal, including financial penalties and fines, suspensions, and even criminal charges.  

The demand for good financial advisors is on the rise, as is the pressure for them to adhere to industry regulations and offer a fair and transparent service to their clients. This blog will look at some of the key regulations set down by the FCA, and why financial advisory professionals and firms would do well to follow them.

Understanding FCA Compliance

The FCA handbook has rules and regulations governing:  

• Business activities and operations of registered firms.
• The structure of the business and the senior management team, including the use of any agents, branches, or other outsourced arrangements. 
• Business practices such as corporate governance, ethics, and how responsibilities are allocated and supervised within the firm.
• The risk management strategy and infrastructure put in place to ensure that the business and customers (and ultimately the industry) are protected. 
• Customer complaint handling processes in the company, as well as staff training for customer-facing employees. 
• Ongoing staff training in the area of compliance and financial crime prevention.
• The establishment of a financial crime framework, including the development and implementation of policies, systems, and controls to manage financial crimes risk. 
• The financial stability of registered companies and the establishment of financial controls to ensure customer funds are protected. 
• IT systems and controls including how incidents are managed and reported. The firm’s data protection and privacy policies must also be demonstrated as per the GDPR. 
• How financial products are promoted and communicated to clients. 
• All third-party relationships, including due diligence before entering into contracts as well as ongoing monitoring of their activities. 

Underpinning all of these regulations is the directive for registered firms to maintain proper records of all business transactions, business communications with clients and colleagues, and any client activity. This rule is critical because it is central to the FCA’s ability to monitor the business practices of registered firms and ensure that all the other regulations are being followed.  

 

Key Areas of FCA Focus for Financial Advisers

Whether you are an Independent Financial Advisor (IFA)  – i.e. not tied to any particular product provider – or a Restricted Financial Advisor (RFA)  – i.e. limited in the products you can recommend or the providers you can work with – you are bound by FCA regulations. 

To maintain their independent status, IFA’s must: 

• Offer advice on the full range of investment products from the entire market. They can’t be tied to any specific product providers.
• Clearly disclose their independent status to clients. 
• Adhere to the FCA’s rules on giving suitable advice by properly assessing a client’s needs, circumstances, and objectives and only recommending products that are suitable for their specific requirements.
• Comply with the FCA’s conduct of business rules, which include requirements for client communications, record-keeping, client money handling, and managing conflicts of interest.

RFA’s on the other hand must 

• Clearly disclose the nature and scope of their restriction to clients. This helps clients understand the limitations of the advice they will receive.
• Provide suitable advice based on the client’s needs, circumstances, and objectives within the defined scope of their restriction.

Consumer Duty, Principle 12 of the FCA Handbook is a critical area of compliance for  financial advisors. This principle states that “a firm must act to deliver good outcomes for retail customers” and the FCA has made it clear that they see this as a key priority for independent and restricted advisors alike. 

There are four consumer outcomes that are indicative of adherence to Principle 12, and the FCA will be closely monitoring financial advisors and taking action if they find these are being undermined. In a speech entitled ‘FCA’s key priorities for the financial advice industry” in November 2022,  the Director of Consumer Investments for the FCA  laid out the FCA’s new expectations related to the four consumer duty outcomes. They include:

• Improved consumer communications. 
• Products and services that are recommended based on whether they genuinely meet the needs of individual clients and that pay close attention to the risks involved. 
• Fair value through reasonable adviser charges compared to the overall benefits the consumer receives. 
• Adequate consumer support, particularly where advisers have undertaken to provide ongoing support to the consumer – this has to be done well.

Why Does Compliance Matter for Financial Advisers?

Compliance with the guidelines set by the FCA is crucial for financial advisers for several reasons:

• Compliance ensures that financial advisers meet their legal and regulatory obligations, ensuring they don’t get landed with a hefty fine, suspension, or even criminal charges.
• The FCA regulations protect consumers from miss-selling, fraud, or malpractice. This ultimately serves not only the industry but the broader economy as well.
• Clients will have more trust in advisers who are compliant with regulatory requirements, leading to stronger client relationships and increased business opportunities.
• Compliance also means that financial advisers can manage the potential risks associated with their services. This reduces the likelihood of financial losses, reputational damage, and operational failures.

When financial advisers adhere to regulatory standards, it promotes transparency, and fairness in the financial services sector. This fosters trust among all the market participants, ultimately strengthening the integrity of the financial markets. 

It’s your basic win-win situation. 

At the same time, the FCA is taking non-compliance seriously, and they aren’t just focussing on the big fish. The number of FCA fines in 2022 increased by 160% compared to 2021, but the overall value of the fines dropped by 61%. This suggests that they are taking increased action against smaller firms, powered by enhanced supervisory technology that can identify problems across market participants of all sizes.

 

How LeapXpert Can Help Financial Advisors to Become FCA Compliant.

Compliance with FCA regulations is always a priority for people and companies in the UK financial sector, but troubled times are making for stricter rules and closer supervision. For financial advisors, compliance can mean not only avoiding hefty penalties but building loyal relationships with clients who trust you and protecting yourself and your business from potential risks and costly mistakes. 

At the heart of compliance is proper record keeping – the way in which you can ensure and demonstrate adherence to industry standards and regulations. LeapXpert offers a secure electronic messaging platform that creates an easily accessible digital record of all business interactions carried out over any mobile messaging application. It ensures that customers can continue reaching out using the mobile-first applications they love while safeguarding and securing both internal and client-facing business-related conversations.

Book a demo with us now.