St. James’s Place shares tumble 30% amid regulatory challenge

The FTSE took a hit this morning, and it was an unexpected one that couldn’t have been priced in.

At one point Wednesday morning, wealth manager St James’s Place was down over 30% in a single day. This means that over the last 12 months, the stock is down 62%, and 72% from its highs at the end of 2021.

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Wealth manager St James’s Place has announced a £426mn provision for potential client refunds and slashed its dividend, sending shares in the group down almost a third in early trading on Wednesday.

The group said it had received a significant increase in the number of client complaints late last year about whether they had received a sufficient level of service, prompting St James’s Place to make the provision.

“We recognise that this is a disappointing outcome for everyone,” said chief executive Mark FitzPatrick, who was presenting his first set of results since taking the top job in December. The provision pushed the company to a pre-tax loss of £4.5mn last year, down from a pre-tax profit of £504mn in 2022.

FitzPatrick cautioned that the industry outlook remained “challenging”. The Financial Conduct Authority has repeatedly warned wealth managers to ensure consumers are receiving value for money when they pay for financial advice, and this month it said it may crack down on high charges.

The warnings are part of the watchdog’s consumer duty regulations, introduced last year, which require companies to meet higher standards of customer protection. Under the new rules, firms must act in good faith towards customers, avoid causing foreseeable harm, and enable and support customers to pursue their financial objectives.

St James’s Place said it anticipated it would take between two and three years to settle the issue and had engaged “extensively” with the FCA on the matter. The £426mn provision was based on a “statistically credible representative cohort” of clients, the company said, however it did not know how many clients in total were affected. 

“The further back in time we go, our ability to evidence the interaction that the client and the adviser had is less available,” said FitzPatrick.  The company said the introduction of a new IT system from Salesforce in 2021 meant that it was now able to monitor the service provided to clients, and that it expected the claims to be a “historic issue”.

But analysts at Numis said on Wednesday that it was “disappointing to see another piecemeal warning/major adverse development to the investment story . . . rather than seeing these issues dealt with comprehensively on one occasion”.

Based in Gloucestershire, SJP became a powerhouse over three decades as its more than 4,000 financial advisers offered clients everything from wealth management to retirement planning.

However, over the past year the group has found itself in the crosshairs of the Financial Conduct Authority over a fee structure long regarded as opaque and expensive. SJP charges a high upfront advice fee for clients when they sign up, and then an ongoing advice fee annually for the relationship with their adviser, which is 0.5 per cent of assets for most clients.

We have pointed out their horrendous charging model on several occasions and it’s nice that it is finally being dealt with. Paying an upfront fee, as well as an exit fee, for business is scandalous, but the public don’t know any better. This could be a lot worse for SJP than they expect, but time will tell.

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Elsewhere in the markets

Aside from this, the markets have moved sideways so far this week as we wait for US PCE price index on Thursday at 13.30 UK time. Economists widely expect the report to confirm that January was something of a setback in the battle against rapid cost-of-living increases.

Inflation, as measured by Personal Consumption Expenditures by the Bureau of Economic Analysis, likely rose 0.3% in January from December, an acceleration from the 0.2% increase in December, according to a survey of economists by Dow Jones Newswires and the Wall Street Journal. Core inflation, which excludes prices for food and energy, is expected to have risen 0.4%, double the0.2% increase of December.

If those predictions hold, the report would likely confirm the signal from a different measure of inflation — the Consumer Price Index — which earlier this month showed that inflation is proving more stubborn than policymakers at the Federal Reserve had hoped. 

“Unfortunately, we expect a similar performance of these measures as in the January CPI report,” Scott Anderson, chief U.S. economist at BMO Capital Markets, wrote in a commentary.

United States PCE Price Index Monthly Change

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The PCE measure of inflation is especially significant because officials at the Fed prefer its reading on the trajectory of inflation over the widely reported CPI. The two measures usually move in the same direction, but lately, a gap has opened between the two, with PCE showing somewhat tamer inflation.

The Fed has held its benchmark interest rate at its highest level since 2001 to subdue the high inflation that flared up after the pandemic. While inflation has fallen significantly since its summer peak, Fed officials have said they’re waiting for more data showing inflation is firmly on its way back down to their goal of annualised 2% before they will begin to reduce the Fed funds rate.

The high fed funds rate has pushed up interest rates on mortgages, car loans, and all kinds of other credit, and another disappointing inflation report could delay rate cuts and keep those borrowing costs higher for longer.

Financial markets are now betting that the first rate cut will come in June, bets that have been pushed back from expectations for a rate cut as early as March.

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Still, even if there is a setback, most economists think figures are bound to fall further in the coming months as rent inflation has fallen over the last year but hasn’t yet been reflected in official data. 

The market in the US seems to be capable of ignoring all reason. Inflation is creeping back, rates cuts are being moved back and will probably have to be moved further back still, and yet, the market ignores it.

When cuts do come in the US, they will be small. If they get bigger, it’s because the economy is in trouble. There is no real winning way out of this, yet a ‘soft landing’ is still the choice of excuses as to why the market is doing so well. We shall see. The market always does well, until it doesn’t; then everyone says ‘I told you so’.

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