Damian Davies: How failing to prove ongoing advice could cost you fees

Davies-Damian-TimebankNew suitability rules suggest not obtaining the most up-to-date information can prevent you from taking a fee

I do not usually get cut up by celebrity deaths but I did on 4 September 2006 when my hero, Steve Irwin, “The Crocodile Hunter”, passed away. Something I learned from him was the impact of unintended consequence.

He explained once about how Western Australia had a terrible problem with cane toads. Back in the 1930s, the young Australian sugar industry was experiencing problems with cane beetles harming crops.

The Bureau of Sugar Experiment Stations had the idea of importing cane toads from Hawaii to eat the beetles. So, in 1935, some 102 toads were released.

The problem was, while they may have enjoyed the odd cane beetle, cane toads were such voracious predators they set about chomping down anything they could fit into their sizeable mouths. What is more, they secreted toxin on their skin, so any predators that tried to eat them were poisoned to death.

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Today, there are an estimated 1.5 billion cane toads in Australia, and with each increasing the range of their habitat by 10 metres a day, they have pushed the boundaries of their expansion more than 2,000km from their original release site, covering an area three times the size of England.

An incredible animal, but an unintended ecological disaster.

Encouraging evolution

I wonder whether our profession is sleepwalking into its own unintended consequence?

Back in June 2007, the FSA released DP 07/1 and the RDR was born. Over the next five years, consultants everywhere were encouraging advisers to change their business model.

They explained a move from commission to fees meant the client relationship would move from transactions to service, and argued that creating long-term, repeated income was the way to secure a firm’s future.

As the fruits of DP 07/1 came to ripen at the end of December 2012, the era of the “client service proposition” was born and we evolved from an industry to a profession and matured into our new role as provider of a professional service. Job done. Sorted.

Well, at least until 3 January 2018, when Mifid II came into effect.

Spanner in the works

The FCA’s newly created COBS 9A section outlines the Mifid provisions for suitability. In brief, if your firm evolved to charge a regular fee for a regular service, this must now include an assessment of the ongoing suitability of the client’s affairs, together with a suitability report. That assessment and report must be undertaken for advice to buy, sell or hold.

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It sounds straightforward but so many are underestimating what needs to be done.

You must undertake the normal assessing suitability requirements, obtaining the necessary information regarding the client’s:

  • Knowledge and experience in the investment field relevant to the specific type of financial instrument or service.
  • Financial situation, including their ability to bear losses.
  • Investment objectives, including risk tolerance.

You must also provide a suitability report for the client based on advice to buy, sell or hold appropriate to the complexity of the arrangements involved.

This is fine, as we should have been doing this or something like it anyway. But there is now an added burden.

Whereas in the past firms unable to confirm such information could default to saying something along the lines of “we haven’t managed to arrange a convenient meeting to discuss this information” and produce some form of review based on the last held information, COBS now states: “Where, when providing the investment service of investment advice or portfolio management, an investment firm does not obtain the information required under Article 25(2) of Directive 2014/65/EU, the firm shall not recommend investment services or financial instruments to the client or potential client.”

In other words, if you cannot gather the up-to-date information, you cannot provide an interim suitability assessment, and if you cannot provide an interim suitability assessment, you cannot take the fee.

Ironically, if you had not changed your model for RDR from transactions to service, you would not get caught up in this new obligation.

Take action

How soon will it be until the FCA adds a new section to Gabriel returns asking you to confirm and prove you have delivered your interim suitability obligations?

Will we see a mandatory requirement to refund fees where interim suitability has not been delivered?

In the past few weeks, I have seen two articles about firms being told to pay back the fees they have taken for a service that has not been delivered – and these occurred before the introduction of Mifid.

Now these “reviews” are a legislative obligation rather than a matter of commercial agreement, the penalties are likely to get stiffer.

So what is the solution? For interim suitability, the answer lies in taking a long, hard look at your client base, reviewing what you offer as a service and creating an efficient system of delivering that service to every client. Taking no action is not an option.

Damian Davies is director of The Timebank


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. Well, as Damian Davies, describes it that extra burden would heap a whole new load of costs to a lot of adviser’s businesses, which would have to be passed on to the customers, a lot of whom could not afford it.

    The authorities really do need to think carefully, for once, what is best for the customer, at the end of the day. If you are checking the performance of a client’s investments and keeping in touch with them (providing valuations) and inviting them to have a review, every year, and they refuse to do so, is it in that customer’s interests to just stop giving them any service? Because if you stop the fee you can’t work for nothing.

  2. Nicholas Pleasure 18th September 2018 at 2:09 pm

    What happened to free will? Clients should have the option to choose whether they want this new service at the significant extra cost it will take to provide.

    IFA’s that charge for a service that they don’t deliver should refund their fees, but firms that are working with their clients are entitled to their fees, even if they assess that a full suitability review every twelve months is a rather pointless exercise where there have been no material changes.

    I’ve just sent a letter to a potential new client concluding that what I would have to charge would make the transaction virtually pointless. How many more of these will I need to send before my business is no longer viable.

    The FCA really needs to review the affordability of perfection.

  3. Often wonder is the real goal to remove advice from the lower end of market. Every new layer of regulation is slowly reducing access to advise for those with limited assets and income.

    It does make you wonder where this will all end.

  4. To be fair we have had ongoing suitability in drawdown for a long time primarily due to FOS.
    The MIFID rules are for the EU where product sales still predominate.
    By their very nature complex clients need ongoing help – where this leaves adviser-less drawdown is not clear but the SIPP providers need to be careful it doesnt land at their door.

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