The FSA today warns some adviser firms could struggle this year because they do not pay enough attention to the sustainability of their business models.
In its 2008 Financial Risk Outlook (FRO), the regulator questions whether firms are “capable” of surviving rapid shifts in the economy, adding some firms pay “insufficient attention to factors that might lead to a downturn in profitability”.
Pointing out the mortgage intermediary arena may be most at risk, the FSA says consumers will bear the brunt of firms’ incompetence unless they do something about it.
“The existing pressure on financial resources combined with a less benign economic outlook means that there is a heightened risk of firm failure and increased pressure to sell products inappropriately, increasing the potential for consumer detriment,” it says.
The FRO focuses on the risks arising from the events of the second half of 2007, and the less benign economic outlook expected over the next 18 months.
The FSA has assessed its impact on banks and building societies, asset managers, plus the life and general insurance markets, but it expects the retail intermediary sector to be heavily impacted too.
On sustainability, the FSA says the extent of the problem has been hidden by comfortable economic conditions in recent years.
“Many firms pay insufficient attention to the sustainability of their business model, particularly in terms of ensuring that it is capable of surviving changes in the economic environment,” it says.
According to the FSA, the mortgage advice industry is particularly at risk if a “combination of pressure on house prices, tighter credit conditions, lower consumer confidence and high levels of personal debt means that both demand and supply of mortgages decline in 2008.”
The FSA also warns firms must ensure they meet their capital requirements in the event of worst-case scenarios.
“Regulatory reporting data shows that, while most firms hold capital in excess of requirements, few have the buffer of capital that might be required in the event of a more difficult economic environment."
The FSA also warns consumer demand for financial product could slip in a tighter economic environment. “This would particularly affect the large number of firms who receive most of their income from up-front commission.”
In addition, the FSA says it “remains concerned” that wrap platforms may be used inappropriately. “While we recognise the benefits to firms and to some clients, firms must still ensure that wrap platforms are used appropriately; that they are used to the benefit of the consumer; and that advisers have the appropriate level of knowledge.”
"That may be true with stand alone mortgage advisers but not IFA’s who have a long term relationship with their clients and write repeat business. Perhaps you should try and be more cheerful." Alan
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