The financial advice sector is no stranger to regulation, but the Financial Conduct Authority (FCA) has made it clear that firms must continuously adapt to its evolving expectations. The latest Dear CEO letter, along with recent thematic reviews, underscores the regulator’s intensified focus on key areas such as retirement income advice, ongoing advice services, firm deauthorisation, and the consolidation market. IFA Magazine’s Senior Financial Journalist, Jenny Hunter takes a look at how these areas reflect the FCA’s overarching commitment to consumer protection, transparency, and professionalism within the financial services profession.[i][ii]
The evolution of financial regulation
Financial regulation in the UK has undergone significant evolution over the past several decades. Since the 2008 financial crisis, regulatory bodies like the FCA have placed greater emphasis on ensuring financial stability and consumer protection. The introduction of Consumer Duty in 2023 further strengthened these principles, compelling firms to reassess their approach to client service, product suitability, and market fairness.
The financial services profession is at an inflexion point, where regulatory compliance is no longer just about ticking boxes but ensuring real, measurable outcomes for clients. The FCA’s stance on financial regulation aligns with broader global trends, particularly within the European Union’s MiFID II directive and the United States’ Dodd-Frank Act. The expectation is that firms operating in the UK must uphold the highest standards of integrity and accountability.
Strengthening retirement income advice
Retirement income advice has been a major concern for the FCA since 2019. While the COVID-19 pandemic delayed its thematic review, the regulator has since resumed its scrutiny and found persistent shortcomings. The findings highlight systemic flaws, including poor record-keeping, misleading outputs from cash flow models, and insufficient consideration of the risks associated with drawdown advice. [ii]
The importance of suitability
The retirement landscape is changing dramatically for consumers too, given increasing life expectancy and shifting retirement patterns. The traditional pension model is evolving, and financial advisers must adapt to the new reality where clients demand more tailored, data-driven advice. The FCA’s findings indicate that many firms fail to assess the full scope of their client’s needs, often relying on outdated assumptions or generalised strategies.
One alarming issue highlighted by the FCA review is the accuracy of data used in retirement planning. Some firms had data accuracy rates as low as 33%, significantly impacting the quality of advice provided. Furthermore, there have been instances where advisers gave clients false confidence that their funds would last a lifetime based on incomplete or misleading illustrations. The FCA has stressed that firms must reassess their practices to ensure advice quality, robust record-keeping, and clear communication of risks to clients.[ii]
The role of cash flow modelling
Cash flow modelling is a fundamental planning tool for advisers but especially so when it comes to retirement planning, allowing advisers to project clients’ financial situations into the future. However, the FCA has raised concerns over the misapplication of these models.
The FCA’s approach to cash flow modelling has been welcomed by Dynamic Planner, amongst others, which noted that the regulator’s framework closely mirrors its own. According to Steph Willcox, Head Actuary at Dynamic Planner, “The FCA is concerned about how firms prepare and use cash flow modelling and has offered a review of usage and guidance into how to improve quality. Dynamic Planner welcomes this review and is encouraged to see that the FCA’s desired approach to cash flow modelling tightly mirrors our own”.
The FCA has outlined five key findings for effective cash flow modelling:[i]
- Firms must ensure data accuracy and not rely on outdated information.
- Justifiable rates of return must be used instead of relying on historical patterns.
- Planning must account for uncertainties such as market downturns and inflation fluctuations.
- Consumer understanding should be prioritised, ensuring clarity in all projections.
- Firms must thoroughly assess the output to confirm its suitability for clients.
According to research by BNY Investments in conjunction with NextWealth, 72% of firms are already adopting a Centralised Retirement Proposition (CRP) or planning to do so. Commenting on the research, Richard Parkin, Head of UK Retirement at BNY Investments says that ‘standardisation and improved scalability will be crucial in meeting the FCA’s expectations.”[ii]
Deauthorisation procedures
For smaller firms and directly authorised advisers, the FCA’s tightening of deauthorisation procedures marks a significant shift. Historically, closing a firm involved a relatively straightforward process. Now, firms must identify and settle liabilities before the FCA grants approval to cancel authorisation.
The introduction of external past business reviews and deed polls adds another layer of accountability, with advisers potentially facing personal liability for unresolved consumer harm. This initiative is designed to ensure that firms cannot simply walk away from their financial and regulatory responsibilities.
A key motivation behind this policy is to combat “phoenixing,” a long-standing issue where advisers shut down one firm only to re-emerge under a new name, leaving behind liabilities and consumer harm. The FCA’s message is clear: firms must take full accountability for their past actions and resolve any outstanding obligations before deauthorisation is approved.
Advisers considering deauthorisation should be prepared for thorough scrutiny. The FCA is working to ensure that liabilities are fully met, consumer protection is prioritised, and financial misconduct is minimised. This shift reflects the regulator’s commitment to upholding transparency and stability within the financial advice sector. [iii]
Consolidating growth and prudence
The wave of mergers and acquisitions sweeping through the financial advice sector has also caught the FCA’s attention. While consolidation can create efficiencies and improve client outcomes, the regulator has warned of potential harm if transactions aren’t handled prudently.
Acquiring firms must demonstrate they have the resources, controls, and culture necessary to manage client banks effectively. Sellers, meanwhile, are required to justify why they chose a particular acquirer, ensuring decisions align with clients’ best interests.
A major concern for the FCA is that poorly executed consolidations can lead to negative client outcomes. This includes mismanagement of client portfolios, inadequate support structures, and increased advisory fees that do not provide corresponding value. Consequently, acquiring firms are now under greater scrutiny to ensure they have the financial and operational capability to sustain client services at high standards.
The FCA has also introduced stricter pre-notification requirements for acquisitions. Firms failing to notify the FCA in advance may face enforcement actions, including criminal proceedings. This marks a significant escalation of regulatory powers and signals a tougher stance on financial firm consolidation.
For firms looking to engage in mergers or acquisitions, the emphasis must be on sustainable growth. Ensuring that client interests are not compromised in the process is paramount. The FCA’s proactive stance on this matter serves as a reminder that while consolidation presents opportunities, it must be approached with caution and regulatory compliance at the forefront.[i]
Demonstrating ongoing value and fairness
Ongoing advice services have become an integral part of financial planning, with revenue from these arrangements growing from 60% in 2016 to 80% in 2023, according to the FCA. However, this surge has prompted concerns about the relevance and value of these services.[iv]
Adapting to consumer needs
Consumer expectations have shifted dramatically over the past decade. With increasing access to financial information and digital advisory platforms, clients now demand greater transparency, value for money, and flexibility in their financial planning. The FCA has expressed reservations that too many clients are being pushed into ongoing advice propositions that may not be suitable for their needs.
Under Consumer Duty, firms are now expected to demonstrate that ongoing services provide genuine value. This means ensuring that advice fees align with the level of service provided and that firms maintain clear records to justify their recommendations.[iv]
A consumer-centric approach
Research by BNY Investments in conjunction with NextWealth underscores the importance of high-quality advice in fostering client confidence. Their study revealed that 86% of advised clients felt more confident about achieving their retirement goals, while 89% rated their adviser’s comprehensibility highly. These findings suggest that firms that prioritise transparency and personalised service will be better positioned to meet the FCA’s heightened expectations.ii
A call for proactive change
The FCA’s focus on consumer outcomes, fairness, and accountability marks a paradigm shift for the financial advice industry.iv Firms must go beyond mere regulatory compliance and demonstrate a deeper commitment to ethical, transparent practices.
As highlighted by BNY Investments, clients highly value advisers who can provide clear, well-structured guidance. With 83% of clients rating their advisers highly for customer support, firms that embrace best practices and proactively refine their approach to retirement advice will be well-positioned for success.
In summary
Whilst this snapshot covers just some of the many issues which advice businesses need to keep on top of, the need for vigilance and diligence when it comes to matters of regulation and compliance is unlikely to diminish in future as the quest for transparency and consumers to be properly protected continues apace.
About Jenny Hunter
Jenny Hunter is a Senior Financial Journalist at IFA Magazine. Qualified as a Paraplanner and Chartered Financial Planner herself, her perspective and insight into the business of advice is based on over a decade of personal experience working in the profession.
[i] https://www.fca.org.uk/firms/undertaking-cashflow-modelling-demonstrate-suitability-retirement-related-advice
[ii] https://www.bny.com/investments/uk/en/adviser/adviser-support/research.html
[iii] https://www.fca.org.uk/publications/consultation-papers/cp23-24
[iv] https://www.fca.org.uk/publication/correspondence/portfolio-letter-advisers-intermediaries-2024.pdf
[v] https://www.fca.org.uk/publications/consultation-papers/cp23-24
[vi] https://www.fca.org.uk/publication/correspondence/portfolio-letter-advisers-intermediaries-2024.pdf
