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FCA: ‘Few advisers are transparent about pricing’

The FCA has pledged to continue to monitor the suitability of advice in its review of the retail investments sector and says “relatively few” advisers are transparent about pricing before they sell advice.

The regulator today published its “sector views”, giving an overall view of how it considers the markets it regulates performed between June 2015 and November 2016. The FCA intends to publish individual sector views online once a year.

The regulator identified suitable advice as one of its areas of focus in the retail investments sector, saying advice firms might give unsuitable recommendations because of conflicts of interest or “insufficient competence”.

The document says: “We have also identified the potential for unsuitable advice being given due to poorly managed or unrecognised conflicts of interest, for example, because of charging structures and vertical integration. We will continue to monitor the suitability of advice.”

Another area of focus outlined by the regulator is value for money and the FCA says some advisers may not pay enough attention to this when they give personal recommendations.

The regulator says: “Relatively few advisers are transparent about their pricing before they sell advice. This does not incentivise advisers to compete on price and may result in limited pressure on them to reduce their charges.”

The regulator also highlighted self-directed customers as potentially paying more for products or buying products that are not good value for money.

The sector view says: “Limited comparability and ineffective disclosure can also lead to non-advised consumers buying products that are not appropriate for them, or that they do not fully understand.”

It says: “The risk can be heightened if firms present information in a way that does not help consumers make an assessment or that takes advantage of behavioural biases. Consumers may also end up paying more than they had expected because of limited means to compare products, and the complexity of some charging structures.”

In its assessment of the retail investment sector, the FCA found that risks remain regarding the remuneration of advisers in vertically integrated firms where there could be incentives to sell in-house products and services.

While the regulator says efforts to drive professionalism are improving the quality of service, “opaque and complex” charging structures make it difficult to compare providers which can result in consumers being charged more than they expected.

On competition, the sector view says the clustering of prices around a similar level is largely down to “poor competitive pressure exercised by the demand side”. It says the Retail Distribution Review removed a cause of the conflicts of interest by changing the way advisers and platforms are paid.

However, it adds: “increasing vertical integration between product manufacturers and distributors has the potential to reintroduce some of these risks”.

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. I agree with those who say IFAs should clearly publish their fee rates or the basis for determining their charges on their websites and relevant documents. If an hourly rate is used to determine fees those fee rates should be published. Of course that is just one side of the equation. An estimate of the time spent (and hence the final fee) can only be provided once the specific work required has been agreed with the client but this should not be used as an excuse not to publish hourly charges. I am also a firm believer that if hourly charges are used invoices should be accompanied by detailed timesheets, so the client can see the specific work done and how the final fee was calculated.

    In addition if fixed fees are charged rather than hourly rates, IFAs should be able to articulate how they are determined. Finally we should all be able to explain what is the value of our work and how it exceeds the cost. Clients will normally be happy to pay for advice if they think it was worth it.

  2. @ Mike Grant
    I agree entirely.

  3. Neil F Liversidge 18th April 2017 at 11:50 am

    ‘…“opaque and complex” charging structures’
    ‘…the FCA found that risks remain regarding the remuneration of advisers in vertically integrated firms where there could be incentives to sell in-house products and services.’
    ‘…the Retail Distribution Review removed a cause of the conflicts of interest by changing the way advisers and platforms are paid. However, it adds: “increasing vertical integration between product manufacturers and distributors has the potential to reintroduce some of these risks”.’

    Has the FCA woken up at last and realised that it made a mistake cutting SJP its ‘unique’ sweetheart deal on charging?

  4. Dont disagree with Mike’s comments.

    However I do feel this is a storm in a teacup. I tell my clients at the first meeting verbally, then in a written fee agreement that they sign and then in post advice documentation like illustrations and our recommendation report.

    Personally I took the decision to remove the fees from the website as it offered little value according to our webhosts. It appears that new clients tended to look at ‘our services’ followed by client testimonials – a sort of what we do and what do other people think. Following that the fee structure – and then left the website. I temporarily removed the fee structure as a test and our conversion to clients contacting us went up significantly. Hence I decided to keep it off the website and it has worked well since.

  5. Trevor Harrington 18th April 2017 at 12:25 pm

    The problem to which the FCA refers is that the client does not really know how much they are being charged because the fees, hourly or specific, and the residual commission or “trail” systems are never added together and laid in front of the client in monetary terms.

    The only solution to this problem is for the Adviser to produce an annual statement of all the charges which they have taken, or “accidentally received” from the client investments including residual commissions, ON AN ANNUAL BASIS.

    The FCA believes that many clients will be shocked, and horrified, precisely how much some Advisers are taking from them in the course of a year, be that directly invoiced or charged, or otherwise ….. and I would entirely agree.

    It can only be a matter of time before the FCA rules that an annual report of all revenues received on an annual basis must be reported to the client …. and in my opinion the sooner the better.

    • Well…if they cannot calculate what 0.5% of £100,000 equates to then, to be frank, I’d rather not entertain them as clients. Life’s too short to spoon-feed grown-ups.

      • Trevor Harrington 18th April 2017 at 4:30 pm

        In the 1990s I recruited and trained 12 financial Advisers, mostly from tied agents such as banks, building societies and direct sales organisations such as the Prudential, where they were earning between £15,000pa and £25,000pa.

        At the final interview stage, only one of them could work out a simple percentage calculation, even with the use of a pocket calculator.

        Recent statistics suggest that our education system (?) turns out 20% of school children who have problems either reading, writing or basic mathematics.

        @ HEREWEGOAGAIN – Of course there are large sections of the public (your clients) who cannot understand what a simple 0.5%pa is …. and you do not want them as your clients …. not very good really … are you !!!

  6. Full disclosure would include current and future regulatory costs, unfortunately we have no idea what they will be. The point is that most jobs of work are estimated, my current insurance work has revealed bigger problems so the contractor has to requote, then I will know the real cost.

    I agree that the consumer should know what he/she is paying for, but it is worrying that the FCA should be so focussed on driving down adviser incomes, at a time when they consistently impose above inflation increases on the industry. Someone has to pay for that, the consumer.

  7. Ever tried to decipher your FCA fee invoice – I have a degree in applied mathematics and I struggle
    @Trevor Harrington – but I am very good with percentages, Linear, Quadratic, Polynomial and Second Order Differential equations and not forgetting Boolean Algebra

  8. Er, I thought that the whole idea of a vertically integrated firm IS to sell in-house products and services?

  9. I can’t speak for how other advisers set out their charges but I know for a fact that, as a member of a network, I’m required to set out in my SR’s ALL charges (platform charges, fund charges and my charges) in the most comprehensive and explicit detail imaginable including, in £ & p terms, examples of what percentage charges are likely to be over the course of the first year. I’ve even read of people who’ve examined SR’s from SJP sales agents and found them fully up to scratch in this regard, whilst many if not most DA firms employ external compliance consultants who must surely be telling them about the FCA’s expectations in this regard.

    So just what proportion of firms are failing to meet the FCA’s required standards in terms of setting out their charges? Or, as I strongly suspect, is this yet another tactic on the part of the FCA to distract attention from its own “sorry history” (Andrew Bailey’s words) of failures?

  10. Andrew Cartlidge 19th April 2017 at 3:20 pm

    There are many more important and urgent matters for the FCA to concentrate its energies upon. This is still a sector in which there is too much fraud, too much incompetence and too many insolvencies – with the competent/honest practitioners and their clients still meeting ALL the bills for the FCA’s continued failures in the latter regard. The culprits largely escape responsibility – and in some cases are still left free to ‘phoenix’. UK financial services is a highly competitive market – and if firms are to be competent and work to a high standard, they need to cover their costs and earn profits. What is ‘reasonable’ in the latter regard is simply not a question for the FCA – but they could assist the market by reducing unpredictable and inexorably rising regulatory costs. If the sector is indeed excessively profitable then there is ample scope for less expensive propositions to thrive. Where is the FCA’s evidence that the independent sector is excessively profitable? The fact is that highly personalised advice of the high standard desired by the FCA is very expensive to provide and the costs (and sector profit margins) reflect it. Instead of hand-wringing over the opposite, the FCA should concentrate on driving the fraudsters and the incompetents to the wall – instead of pushing sector costs up with a potentially pointless review. If the vertically integrated firms present challenges in terms of opaque charging, then the FCA should address those with them. The FCA could do far more to control its own extortionate costs and general effectiveness – as a monopoly, it has no need to answer to the market, it profiteers and abuses its monopoly power by over-remunerating its staff. The FCA should be concentrating on the issues it was created to resolve – the pricing of services in a highly competitive market is not one of them. Quality advice costs – ‘cheap’ advice costs less – but clients will get what they pay for and the FCA will not favour the ‘cheap’ version of advice – so it should be careful what it wishes for. More claims on the FSCS – bigger bills for the quality firms and their clients. Regulation at its most effective? In terms of pricing and costs, who is assessing the assessor in terms of value for money?

    • To answer your final question, the answer is nobody, an issue I have flagged many times but on which none of our supposedly representative bodies appear to be making any efforts. At all. The TSC tries from time to time to challenge the FCA on this and other issues but it has no powers of enforcement. Hence my description of Andrew Tyrie as an impotent poseur. The FCA knows this and effectively thumbs its nose at the Committee or, as did Sheila Nicoll when appearing before it back in March 2011 alongside Hector Sants, merely smirks contemptuously. We need a regulator of the regulator so that it cannot, as it regularly does, ride roughshod over anyone or any body which dares to try to stand in its way. APFA’s claims to “hold the regulator to account” are nothing but a wet dream.

  11. I’m not in total agreement about just publishing fees on a web site. As others have said there is too much wriggle room.

    Perhaps my own method may ring a bell. I always stated that the first meeting didn’t bear a charge. The purpose of the meeting was two fold. The prospective client got to ‘interview’ me to ensure they found me satisfactory. For my part I also wanted to establish that I actually wanted them as a client. But my main purpose was to see what is was they required of me. Once that was established and the various details recorded that was the end of the meeting. After which I would write to the client. I would tell them what I would do, how long I thought it would take and the cost – as a fixed fee. If I miscalculated and I took longer tough on me. If I sailed through it more easily that anticipated – that was tough luck on them. But we both knew exacctly what we were in for. Additionally the costs of any fund management or platform was also mentioned as was the option of an ongoing service from me and how much that would cost. Perhaps I may have missed something but I really don’t see how I could have been more transparent. If the client wanted to proceed then they had to return and sign the pre-populated engagement letter, spelling out all the charges. So no pressure on the client. Once that was received that we cold progress.

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