FCA COMPLIANCE: HIDDEN DANGER FOR IFA CONSOLIDATORS
The news that True Potential has reserved £100m for compensation serves to remind consolidators of regulatory reality in our industry. While centralizing investment propositions and acquiring clients might seem straightforward, True Potential’s situation demonstrates the compliance complexities at scale.
How can boards verify Consumer Duty compliance when advisers face incentives that may conflict with client interests? Without satisfactory proof, firms risk facing Section 166 reviews – exactly where True Potential finds itself today.
Some industry insiders suggest many consolidators employed similar client migration practices. If true, we will see other major players receiving similar FCA scrutiny, potentially requiring them to contact clients about case reviews and offer redress or fee refunds.
This could develop into a significant industry issue that temporarily halts consolidation activity. Consider the scale: if 5,000 advisers transferred approximately £20m each to consolidators over the past decade, we will be looking to re-examine £100bn in assets potentially subject to compensation claims, spread among perhaps 50 clients per adviser.
With regulatory action likely finalizing around 2026, consolidators may face a challenging period ahead. While previous industry reviews have been costly (£12bn for pension mis-selling, £5bn for endowments, £50bn for PPI), those payments came from established institutions with substantial reserves. Today’s consolidators lack similar financial cushioning.
Experience tells this author that if you write to customers inviting them to review the advice, about half respond, half of those want a review, half of those may have lost money, compared to the alternative, and half of those files, in the end, turn out to be compliant. So that leaves a cohort of six per cent,. Just SIX PER CENT? Well that could be £6bn at risk of some sort of pay out, perhaps even a refund of charges. If the average charge is over three years, and amounts to one per cent per annum, that makes £180m compensation. With perhaps 30 clients per adviser directly affected, this makes some 150,000 client files.
Professional indemnity premiums will probably rise, with consolidators facing potential coverage limitations requiring additional capital reserves. The only strange thing is that the FCA so quiet on it. Maybe this doesn’t fit their agenda of helping the UK with growth and de-regulating. See related article on the new board appointments.
The real damage is in the time and money to review all those files. Traditionally it costs about £150 to review a file. Some of the occupational pension transfer reviews cost closer to £2k each file – but that is and was significantly more complex, and required specially trained assessors. AI will come to the rescue.
BAT has the solution here. BAT can review files at £10 each, using bespoke AI. Run that number against 150k files, and you have some sense that our industry can get through this scandal.