Early findings from the FCA’s suitability review suggest many advisers are still struggling with disclosing their charges to clients in a way the regulator is happy with.
Almost a year after the FCA requested 1,200 client files from 700 firms, the regulator has given individual feedback to firms on suitability and is aiming to publish its wider feedback and findings by June.
But while the advice sector has been preoccupied with suitable advice, another issue has come to the fore – disclosure.
While many advice firms have passed the suitability measure, the emerging findings suggest the regulator has found issues with charges disclosure among a significant number of firms.
Ahead of the findings being made public, Money Marketing has spoken to some of those in the know to establish the concerns the FCA has identified, and where advisers may be going wrong.
The early findings
Money Marketing understands the FCA has quoted a headline figure which stated that across the adviser sample, only a third of firms passed on disclosure, though that figure has not been verified. The FCA declined to comment.
One senior source from a major advice firm says: “I would say that’s not the adviser’s fault. Thousands of advisers sit out there in their own little world, with nobody talking to them, no supervision, and only a call centre to phone for the regulator.
“The FCA will tell you itself its pile of regulations is 6ft 2ins high. I don’t know how an adviser is supposed to go and find what they are supposed to do. And no one ever comes and checks until the FCA comes and does a thematic visit. My plea to the regulators is do not beat up advisers for this. This needs to be a collaboration between regulated and regulator, for them to get together and say ‘how do we make disclosure simpler?’”
Law firm Eversheds Sutherland regulatory managing director Simon Collins says disclosure is overwhelmingly being flagged as an issue in the cases he has seen from the suitability review. He says concerns have been raised on the clarity with which advice firms are disclosing their charges and putting it into cash terms.
He says: “It is about spelling it out so the client can clearly see in pounds and pence what they are going to be paying for, what that figure is and whether it represents good value.
“The evidence has been around clarity, where the charges appear in the suitability letter, and whether clients can tell at a glance what they are paying and what is the bottom line. This is wrapped up in the overall clarity of the suitability letter. There is still a challenge related to this in the length of the report itself, which keeps repeating the same thing or is full of caveats that are not relevant to the client but which become the default position.”
Collins says where the FCA has seen clear and explicit explanations of fees, the regulator has been quick to point this out and commend advisers for doing so.
“It is about spelling it out so the client can see what they are going to be paying for, what that figure is and whether it is good value.”
He says good examples have been where firms have set out indicative costs, then confirmed the actual figure further down the line.
He adds: “If an advice firm genuinely doesn’t know what their charge will be, then they can’t do more. But if a firm is saying ‘our charges will range from 0.5 per cent to 2.5 per cent’, what does that really mean? A quote of between £2,000 and £5,000 – you can’t budget for that.”
The FCA has previously signalled its disappointment that advisers are not disclosing the cost of advice properly as part of a separate thematic post-RDR review.
Personal Finance Society chief executive Keith Richards says the latest wave of results is not surprising.
He says: “That is not to say firms are hiding their costs. They are just finding it hard to demonstrate them in a way that is as clear and transparent as what the FCA is expecting.
“Some advisers still find it difficult to articulate their costs, and sometimes this is through a lack of confidence in the value of the service they provide. Many of those who have switched to a pure fee-based firm will tell you that their confidence grew the more they saw that clients were not offended by the amount, and that the more transparent they as advisers were the more engaged the client became.”
Richards suggests the issues with disclosure may be due to some firms’ dependency on contingent charging, as well as wariness from the regulator on whether clients really understand what they are paying when charges are facilitated through the product.
He says: “There is still some work to be done. From the evidence we have seen it’s not a deliberate attempt by advisers to be opaque, it’s part of an ongoing process. Where we have challenged the FCA is it must continue to offer the market examples of good practice, to allow firms to better understand its expectations.”
Threesixty managing director Phil Young says of the cases he has seen, the majority have had no issues with suitability, but where concerns have been flagged these are typically around disclosure. He says: “To say these files have failed would be a misnomer, it’s more that issues have been picked up.
“There’s already a requirement in FCA guidance to have one illustrative example. It’s not sufficient to say ‘we charge £200 an hour for advice’; what they want is a worked example with clarity around ‘if you came to us we will charge this amount and will do x, y and z’.”
Richards is also wary about categorising files that need improvement as “fails”. He points out the FCA has made a “no enforcement” pledge as a result of the suitability review, with the findings used only to understand what is happening across the advice market and give further guidance.
“That is not to say firms are hiding their costs. They are just finding it hard to demonstrate them in a way that is as clear and transparent as what the FCA is expecting.”
The FCA may be deliberating in how it presents its results, given the lobbying going on all sides. In any debate about charges, consumer groups push for the requirement for advice fees to be available online, while advisers argue there is no “one- size-fits-all” charging model.
Young says Threesixty will often advise firms to put more detail in about charges, only for the FCA to request yet more information to be disclosed. He notes in some cases the regulator has been quite “picky”, while at the other extreme some firms are disclosing charges in so much detail the clarity for the consumer is lost.
He says: “A lot of advice firms just don’t want to put that much detail in there. Fundamentally, you want to sit down in front of a client, explain it to them and sell them into what the value is. That’s exactly why groups like Which? want charges put on an adviser’s website, which removes the emotional sales pitch that goes on and makes it easier for consumers. I have some sympathy with that argument.”
Richards says: “The difficulty is no one leads with their price. Advisers lead with the features and benefits of their service. You’re never going to engage someone if all you’re doing is reminding them how much you cost.
“It’s taking a while for some advisers to get over that hurdle of demonstrating costs in the clear and upfront way that the regulator wants to see them. The dynamic for advisers is they want to make sure they tailor their service, so they can’t give the actual cost until they have assessed the needs of a client and worked out how much work is involved and given them a tailored quote. From a regulatory point of view and from the consumer group’s point of view, they think advisers are hiding their charging structure behind that principle.”
He says there is also a suspicion that advisers will try to overcomplicate things in order to charge a higher fee, whereas in reality many advisers will deliver advice for a fixed fee for simple cases. The trouble is, these cases occur under the radar so that advisers are not overwhelmed with new enquiries.
Richards adds: “Advisers are more generous with their time than the data is able to capture. There is always a distorted focus on adviser charging, rather than a more rounded approach to just how much value the advice sector is giving back to the community.”
The FCA expects to publish its feedback in the next few months once it has collated its findings.
Young says the regulator has asked firms to inform them if they feel their individual feedback has raised issues that are “factually incorrect.”
He says: “There are a couple of cases where firms are going back and saying ‘this is factually incorrect, and here’s what you’ve missed. So there’s an issue there. We have spotted small inconsistencies from the regulator, and the FCA is not hammering people over these issues, it’s more about bringing out best practice. There has also been the odd issue which has been more significant.
“The FCA may be stalling as feedback has gone in, and advisers have said they disagree and provided further evidence. The regulator will have to have a look at that and consider it before its findings are finalised.”
Collins says the FCA will be keen to position its guidance in a positive light, and move away from the negative messages seen over recent years over churning and centralised investment propositions.
Collins says: “The FCA will want to get across that there have been demonstrable improvements in evidence of suitability.
“If the underlying suitability is OK, but the clarity around communication isn’t there that’s probably something firms can work on. If suitability is completely wrong, then regardless of disclosure you’re looking down the barrel of a past business review or some form of remediation.”
He adds it is all about firms having confidence they are charging what they are worth.
He says: “There is still a bit of nervousness there. It comes down to the maturity of the business model as well. The firms that get it right are the ones that have grasped fee charging and the explicit nature of that, and they are fully comfortable and confident with it.
“There is a significant number of firms that are still on that journey. It’s also about having quite a straightforward approach, and working to a less is more model when it comes to the different options. Otherwise disclosure can become overengineered and that is where you can lose the clarity.”