Tim Sargisson: The FCA believes that bigger is better

Need to prove regulator wrong

clock • 3 min read
"Smaller firms are perfectly equipped to provide suitable advice."

"Smaller firms are perfectly equipped to provide suitable advice."

Commentating on recent comments from one of the FCA's directors, Tim Sargisson gives his view on the bigger versus smaller business debate running in the advice arena...

I read recently that the FCA's director of consumer investments, Debbie Gupta, opined that large advice firms are better equipped to give suitable advice than their smaller IFA counterparts. Her view is based on the fact that large advice businesses have more capital, which allows them to employ better systems and procedures, and are therefore better able to give suitable advice compared to their smaller counterparts.

In March this year, Ms. Gupta stated that the FCA cannot be held responsible for the "unsustainable" increases in FSCS levies and professional indemnity costs felt by advisers. However, Gupta was clear that stemming the flow of poor advice is absolutely crucial. Although not calling out small advisers on this particular occasion, the fact remains that small firms dominate the adviser landscape.

According to the FCA's figures published in July, of the 4,832 financial adviser firms in 2020, 4,373, 90%, have between one and five advisers. Indeed, there are only 35 firms with more than 50 advisers that could be considered significant. Therefore, it's reasonable to assume that a proportion of unsuitable advice has to be laid at the feet of the small adviser.

While I should declare an interest as CEO of one of the 35 firms, I don't believe this argument is particularly constructive. This idea that small is bad and big is good polarises the debate based on size, where the affronted 'small adviser' fights back, dominating the discussion boards.

The issue that matters is not size per se, but the consequences of failure among small firms. Debbie Gupta is right to highlight the risks. Smaller firms with lower capital adequacy levels are more likely to fail when complaints begin to stack up.

We accept that complaints concerning defined benefit transfers can involve eye-watering sums to put things right. In addition, the lack of adequate PII cover in these firms increases the likelihood of failure. At which point, the whole lot falls on the FSCS. This pressure on the FSCS is evidenced by a further 19% increase in the FSCS levy. From £700m to £833m in 2021/22.

The fact remains that smaller firms are perfectly equipped to provide suitable advice. Providing, of course, they ensure they employ requisite governance and oversight, risk management controls, coupled with robust systems and processes in their business. This is the real point that must be stressed. The pressure on every advice business comes in many forms and has grown exponentially in recent years. 

What cannot be denied is that there are fewer shoulders to carry the burden in smaller firms. At the same time, the workload continues to increase. The FCA's latest focus on consumer duty is a further initiative designed to ensure that firms take better care of clients across four areas: Communication, Products and Services, Customer Service, and Price and Value. Interestingly, Sandringham has grown its business by supporting advisers in these areas.

In conclusion, for Ms. Gupta to be wrong and the howls of outrage among the adviser community to be justified, every small business owner and small business director need to judge whether they are doing enough. In other words, they need to consider the levels of governance and oversight, systems and controls and risk management that operates in the firm.

The FCA has not yet defined the term conduct risk, but the regulator talks a lot about conduct risk and why boards and senior management should take a closer look at it. Firms are required to rely on their understanding of what good conduct looks like by following the FCA's statutory objectives.

I would love Debbie Gupta to be wrong. However, ultimately, it's down to every one of us to prove that this is the case.

Tim Sargisson is CEO of Sandringham Financial Partners

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