The Financial Conduct Authority (FCA) has warned about conflicts of interest and the value of advice as it identified a number of areas of focus within the retail investment sector for the coming year.
In its Sector Views paper, released alongside the regulator's Mission Statement and Business Plan 2017/18, the FCA said it had seen several issues with financial advice, which it planned to monitor going forward.
It was concerned about investment advice suitability and the cost of advice as well as products being designed to suit advisers not the end investor, it said.
"Some advisers may not pay enough attention to value for money when they make personal recommendations to consumers," it said. "Relatively few advisers are transparent about their pricing before they sell advice. This does not incentivise advisers to compete on price and may result in limited pressure on them to reduce their charges."
It added: "Some firms may not be providing suitable investment advice consistently. Firms offering advice may make unsuitable recommendations because of conflicts of interest or insufficient competence. We will continue to monitor the suitability of advice."
The FCA said the implementation of the Retail Distribution Review had removed a significant cause of conflicts of interest by changing the way advisers and platforms were paid. However, it was concerned vertical integration between product manufacturers and distributors had the potential to reintroduce some of those risks.
"Our assessment suggests that risks remain regarding the remuneration of individuals, especially within vertically integrated firms where customer-facing employees could be incentivised to sell in-house products and services," the FCA said.
Poor product design
The regulator also identified a number of topics to work on alongside the key issues raised in last year's Asset Management Market Study.
It said it was concerned providers were focusing too much on designing products that were easy to manage, or suited advisers, rather than delivering products that met the end-investors' needs.
The regulator is also worried some investment managers might be paying too much for services on behalf of investors due to a lack of transparency around some fees and charges and a "failure to consistently monitor, assess and deliver on ‘best execution'".
In addition, the FCA said market stability was at risk of a "disorderly wind-down" by investment managers and their portfolios.
Overpayments and research costs
In last year's Asset Management Market Study, the FCA found there was limited price competition for actively-managed funds, meaning investors often paid high charges that were not justified by higher returns. While there was stronger competition on price for passive funds, the FCA said there was still poor value for money in this segment.
In addition, in the Sector Views paper, the regulator said research costs were having an impact on returns to investors.
"Investment managers purchase two key services on behalf of investors; third-party research to inform decisions, and execution services to implement decisions in the wholesale markets for their portfolios. Portfolios pay for these services through transaction costs on top of the annual management fee."
It added its May 2016 assessment of research and execution services found the costs of these were "limited and complex" and the arrival of MiFID II could reduce the number of research providers and also result in the growth of specialist providers.
Furthermore, research and execution costs were bundled together by the sell-side which could not provide a clear price to the investment
manager. The investment manager was therefore unable to value the
The Sector Views paper flagged concerns that market stability could be affected by the failure or disorderly wind-down of one very large asset manager or several asset management firms, as "end-investors attempt to redeem their holdings on demand, creating a downward selling spiral."
In February, the FCA published a discussion paper on the regulatory approach to open-ended funds investing in illiquid assets after a number of property funds were suspended by groups on the back of heightened redemptions following the Brexit vote in June.
It said it was drawing responses on this until 8 May to decide whether changes needed to be made to Handbook rules and guidance.
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