We may have bid a not-so-fond farewell to 2022, but many of the challenges it spawned will be hanging around for this year, too.
For the advice sector, the key themes for 2023 comprise a mixture of industry-centric stuff (chiefly whatever FCA demands from you) and broader economic topics like inflation, and the small matter of a looming global recession.
As these will impact both your businesses and your clients, it can be helpful to get ahead of what's in store.
So, let’s look at some of the key themes and events that promise make their mark on financial advisers and mortgage brokers in 2023.
According to recent research by technology firm, Dynamic Planner, regulation continues to prove the biggest headache for advice firms.
And unquestionably the largest of its kind right now is Consumer Duty.
With the final consultation paper published in late-July last year, firms should now have a clearer idea about how to meet the new rules, and when they need to be met by.
Some of the regime’s deadlines have already passed. By 31 October, firms’ boards - or equivalent management body - needed to have agreed their implementation plans and be able to prove that they have been scrutinised and challenged sufficiently to ensure they are robust enough to meet the new standards.
This year, there are two more key milestones for firms to be aware of. The first of these is that, by 30 April 2023, “manufacturers should have completed all the reviews necessary to meet the outcome rules for their existing open products and services so they can share with distributors to meet their obligations under the Duty, and identify where changes need to be made.”
Then just a few months later, by 31 July, all firms must have implemented new and existing products or services that are open to sale or renewal. To embed any closed products or services - those no longer marketed or distributed to retail customers nor open to renewal - firms get an additional 12 months.
This may seem like a sizeable amount of work right now, and for many firms it might be, but by the end of 2023 the requirements of the Duty should be incorporated within firms’ propositions, and (hopefully) be one fewer regulatory headache to worry about.
Another of 2023’s potential themes is for advice firm consolidation to ramp up.
Clearly, M&A will occur throughout the year; it’s been one of the sector’s hot topics for many years. But there are signs that things could get swelteringly hot during the next 12 months.
So, what are these signs? Well, smaller advice firms are finding it increasingly hard to absorb the cost and resource of meeting the ever-burgeoning regulatory demands. To the extent that many are eyeing up alternatives.
Recent data from the FCA shows the smaller end of the market is shrinking. While the number of firms with 50 or more advisers rose 17 per cent from 2020 to 2021, those with five or fewer advisers fell 4 per cent.
A common reason smaller firms sell to larger outfits is to offload some of the heavy lifting around regulation and compliance. Those with greater scale often have centralised functions to take admin duties off advisers’ hands, freeing up more time for them to spend with their clients.
A further driver here is demographics. We recently wrote about the need to fill the void left by retiring advisers, with the average age of UK intermediaries believed to be in the mid-to-late 50s.
If swathes of older advisers decide 2023 is the year to shut up shop, increased acquisition activity is inevitable.
A big consideration for firms looking to sell, whether to exit the profession or gain the financial backing to scale up, is to secure a deal that suits their client bank. We hope that if consolidation activity does ramp up this year, clients will not be shoehorned into less favourable propositions as a result.
One of last year’s headline themes, the cost of living crisis, looks set to endure 2023. And quite possibly beyond.
Despite falling to 10.7 per cent in December, inflation remains painfully high. Households have had to cope with rising fuel, food, and utility costs for the best part of a year. And although inflation is set to temper by mid-2023, price rises are still likely to outstrip wage increases for some time.
What’s more, with the energy price guarantee due to rise to £3,000 for the average home on 1 April, and millions of borrowers seeing mortgage payments rise sharply, household finances could reach breaking point.
As such, protecting families from surging costs is high on the government’s agenda. Prime minister Rishi Sunak recently outlined five promises for the year ahead, one of which was to halve inflation “to ease the cost of living and give people financial security.”
But it's worth noting, even if Sunak achieves his aim of cutting inflation to around 5 per cent, this is still some two-and-a-half times the Bank of England’s target of 2 per cent.
Meanwhile, many global stock markets experienced a rough ride last year – the FTSE 100 proving one of the few exceptions, closing a few points up. Although markets have got off to fast start this year, there are some worrying signs ahead. The International Monetary Fund reckons a third of the world’s economy will enter recession this year. And given markets often suffer when economies struggle, investors should brace themselves for plenty of volatility. However, 2023 may well be a tale of two halves, with the second part of the year proving brighter.
Clients with the greatest concerns about market performance are likely to be those close to or in retirement, particularly retirees relying heavily on income drawdown.
At a lang cat event on 5 October last year, the FCA’s department head for advisers, wealth and pensions, Nick McGruer, announced the regulator was beginning to sharpen its focus on retirement income strategies.
Until recently, the defined benefit market has taken much of the FCA’s time and resource, but with that work nearing conclusion, for the time being at least, the City watchdog is switching its gaze to other areas of the market.
The regulator is still in the information gathering stage at present, according to McGruer, and is yet to identify any areas of harm. That said, whether consumers are using drawdown appropriately has prompted concern for quite some time.
These worries surfaced as soon as then-chancellor George Osborne claimed “Let me be clear. No one will have to buy an annuity,” upon unveiling the pension freedoms in 2014.
Almost seven years on from the reforms being introduced, the anticipated shift from annuities to drawdown has indeed come to pass. And even though consumers haven’t splurged their retirement pots on fancy sports cars as some initially feared, there is sense that - both from the regulator and the wider profession – some consumers might be selecting drawdown despite guarantees being more suitable.
Economic developments last year have certainly had a major impact on the retirement savings space. Until 2022, annuities had been in the doldrums for more than a decade, but the string of interest rate rises from the BoE is sparking a revival. In October, annuity rates hit a 14-year high, increasing more than 50 per cent over a 12-month period, according to Canada Life.
Whether the improved rates will swing annuities back into favour is still too early to tell, but it’s certainly made them more attractive.
This may prove timely for the FCA’s expected consultation on whether the retirement income market is truly functioning as it should. Perhaps we’ll learn more later this year.
It might well be a case of new year, same challenges for advisers. But getting ahead of what’s to come will help protect your both your clients and your business from any potential shocks.
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