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FCA suitability review reveals advisers struggling with disclosure

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.”

‘Hiding’ costs

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.”

Price hang-ups

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.”

Next steps

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.”


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There are 19 comments at the moment, we would love to hear your opinion too.

  1. It wouldn’t surprise me to hear that many (thoroughly decent) advisers struggle to do just about ANYTHING in a way with which the regulator is happy.

  2. There were two main aspects to the FCA review: suitability + disclosure. Out of the two suitability has much more potential detriment on clients. If there were major concerns about suitability to come form this review we would have known about it by now. So the real story here is that – in general – advisers are producing suitable advice. This is good news.

    • Agreed, disclosure can be easily fixed – if suitability was generally poor then the profession would be in real danger. As Gaynor says, the post RDR publications give lots of really good disclosure examples, its not even complex.

  3. We ‘disclose’ our fee structure in our Client Agreement, T&C’s, online so that Clients can work out the approximate cost based on ‘their’ understandimng of the value of their investments / cash.
    We then ask potential clients who have made an appt to view the details and confirm back to us that they still want to continue with the appt. It helps the potential Clients to understand the fees and mak an infoirmed decision without feeling under pressure to continue just because they have had a ‘free’ initial discussion. It works well and eliminates those that are ‘trying it on’ just to gather information for ‘doing it themselves. We also have our 1st ‘Pension and Investment, Animated Storyboard’ to try to help clients understand better how Pensions and Investment Management works. It is on our new website which is being released overnight tonight – The more we disclose the better that trust from Clients will develop or return after the debacle of the ‘With Profits’ Endowment plan failures.

  4. We had feedback on disclosure that we didn’t set out enough examples. i.e. When a client might pay x fee and when they might pay y fee. It wasn’t enough to have a general guide with specific disclosure in the clients case. Of course Bankhall had said the document was fine.

    That’s the issue we have with our industry. Even the service providers like Bankhall don’t know what the regulator expects and that seems to highlight issues with the way the FCA go about regulating.

  5. it is not rocket science, charge for what you do on a hourly basis, this also includes on going service.
    The problem is often greed and the way our business are valued, FUM and percentages.
    Be brave, open and just charge for what you as a firm do for your clients . . .
    Trust me, it works 🙂

    • Who then pays for all the extra hours and costs that aren’t directly attributable to a particular client, but without which the business couldn’t operate. i.e. portfolio research, platform research, reading lang cat reports, professional subscriptions, FE/Morningstar subs, CPD, cleaning, making tea, shredding?

      • I agree completely. There is so much of our roles as advisers that can not be attributed to an individual client for that reason it can be very difficult to work out the cost of advice down to the individual client.

  6. I offer the client a piggyback so they can see exactly what work I have done for them and then disclose in pounds and pence what I have done for them in an extensive opus.

    My back aches but I bask in the glow of full disclosure

  7. I shouldn’t think that any firms operating a charging model similar to that of Informed Choice (which I try to emulate) have any such difficulties (or at least I don’t see why they should).

    1. Initial meeting: No charge (at our expense).

    2. Assessment of work required/advice to be given: No charge (at our expense).

    3. Cost of actually doing that work: Set out as part of 2. above on a case by case basis (everybody’s circumstances are different). Cheque required upfront.

    4. Don’t want to pay? Okay, nice talking to you.

    5. Cost of implementing any product recommendations: Nil.

    6. Ongoing services: Set out as part of SR, incl. costs (usually a percentage of assets under advice, with examples).

    How can that be unsatisfactory to the regulator?

  8. The problem here is in trying to give generic examples. We had our car park relaid recently and the builder measured up and gave us a fixed price quote for the specific job at hand. If next door wants theirs doing it will be different. How on earth can one give a generic estimate in a standard disclosure document when every case will be different?

    We know our unit rate plus profit margin and price according to the work being done. Our FCA fees, taxes and rates are not priced in this way so if suitability is the watchword, how come only yesterday I read that high charges does not lead to unsuitable advice?

  9. The perfect storm…

    A recent training day with a well-known FCA employee outlined what the FCA are looking for. In essence the IDD is like a menu outside a restaurant, if they dont sell hamburgers/sushi, then they arent on the menu. The final bill is specific. Even in a restaurant the 10%+ service charge has a £ value.

    Most seemed sensible, except when it came to monthly contributions. You are meant to show in £ the amount paid to the adviser over the expected term… yet in practice most are mini single premiums…

    As for hourly rates, hugely complex and if you dont offer them, we were told you dont need to show them…anywhere.

  10. We all know disclosure is not difficult, how hard can this be, stated in pounds and pence, percentage as well if you us this model and the client to sign to agree the fees. If a client cannot understand this, should they be allowed to move freely or should they be restrained for their own safely and that of society.
    I believe this has more to do with consumer groups looking for fixed fees for all advice work, clearly stated on all documents and websites for consumers to shop around. They are falling to understand the liabilities and complexities of your work.

  11. ‘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.’

    I’m sorry, but if an advisor sits out there in his own little world he/she deserves everything he/she gets. Try going to a widely advertised ‘Positive Compliance’ workshop run by the FCA! For heaven’s sake!!

  12. When you sign up a new client, ask them for a copy of their CV so that you can start filling in the fact find before meeting them.

    If it shows they have a decent GCSE or O-level in maths they should be able to understand percentages.

  13. Could the FCA be guilty of becoming shadow directors of IFA firms, they do rather apear to be to much in control. As someone said this smacks of consumer pressure for flat feeds. You can’t get those from a solicitor or an accountant, most of them still charge upon the clients ability to pay. So just charge and hourly rate and something for petty dispursements.

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