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FCA: High charges don’t necessarily mean unsuitable advice

Documents released by the FCA shed light on how the regulator has assessed IFAs in its advice suitability review.

Notes from a two-day file review training course released under the Freedom of Information Act show how the FCA wants file reviewers to check both suitability and disclosure requirements.

Among the guidance given by the FCA is that high charges don’t necessarily mean advice is unsuitable.

Under the heading “High adviser charges” the FCA notes that “so long as adviser charges [are] disclosed clearly then [it is] normally up to client to agree/decline and not a suitability issue.”

The exception, it says, is in so-called “self-defeating transactions”.

Outcomes, not process

The regulator lists two key questions under a section called “Outcomes, not process”. For suitability, this is “has the client ended up with the right solution”, and for disclosure, it is “have the required disclosures been made and is the client likely to understand (i.e are the communications clear, fair and not misleading.)”

The FCA lists six generic measures on which firms could have failed on suitability, including where the client has been recommended a solution that does not match their timescales, where the client has been recommended a solution where there is a need for ongoing reviews but this is not explained, offered or put in place, or where solutions do not take into account the client’s tax position.

There are five generic ways in which firms could have failed on disclosure, including failing to provide initial disclosure of services and charges, not providing enough detail about products, and failing to provide an adequate suitability report.

A slide from the FCA’s training course on file reviews.

Firms judged as “uncertain” on disclosure did not need to have committed a rule breach, but could have been judged because they did not provide some disclosure material for review.

The FCA also notes that “poor disclosure does not automatically result in unsuitable advice”.

Under Rule 4, the trainer asks reviewers to “Keep it balanced” with “balanced judgment and “balanced comments”.

FCA file reviewers are also told to not be “judgmental about a client’s objectives” and are reminded that there is “no perfect solution”.

Best practice

The regulator also provided some good practice examples to file reviewers of how their feedback should be presented.

For example, for the feedback: “I’ve rated this as unsuitable as the risk level of the investment does not match the client’s ATR and term of investment. There were also problems around the additional costs being incurred by the new scheme”, the regulator’s good practice would be to spell out the reasons why the client’s recommendation did not match their ATR and to provide more detail on why incurring costs would have been unsuitable in this case.

The regulator suggested phrasing such as: “I’ve rated this as unsuitable as the risk level of the investment does not match the client’s risk profile. The answers to the risk profiling questionnaire clearly indicate this is a cautious client and this is supported by the client’s existing investments. The fund recommended meets the firm’s definition of medium risk. It is also unclear in relation to additional costs – the existing fund appears to be meeting the client’s needs and objectives and it is unclear what additional benefits the additional costs bring.”

Insistent client advice

Under a slide headed “Pension freedoms 2” the regulator acknowledges “clients can be irrational”.

When it comes to insistent clients, who wish to transact against advice, the FCA reiterates its guidance for advisers:

  1. Give a suitable recommendation
  2. Clearly explain the risks of the alternative course of action
  3. Flag that the client is acting against advice

The toolkit presented in the training for assessing the suitability and disclosure of investment advice did not apply to discretionary fund management, drawdown or occupational pension scheme transfer guidance.

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Comments

There are 17 comments at the moment, we would love to hear your opinion too.

  1. 2 FULL days of training eh?

  2. It is a fool who knows the price of everything and the value of nothing. Maybe the passive industry is sailing too close to the former…! Businesses which exploit their customers for their own ulterior financial aims do not thrive let alone survive in the end, even if some hang-in-there for far longer than they should till they are found out!

  3. What is a self defeating transaction?

  4. This seems reasonable to me and in fact I would go as far as to say th aI think the FCA is possibly starting to think rationally.
    It would be an idea to provide the same training, applying the same rules to FOS in order to get everyone on a level playing field. Good on you FCA . Now there’s a phrase I ever thought I would be saying about the regulator (if it is put into practice)

  5. Am I missing something here ?

    What exactly is the correlation between cost and advice ?

    I mean, what the heck, has what I charge my clients, got anything to do with weather the advice I give is good or bad ?
    Following on from the FCA’s train of thought, if I charged nothing odds on the advice would be sound !
    If you follow Robert Reid’s train of thought if you charge high you will be getting a better service and value.

    Sometimes I think, I work in a parallel universe

    I am disappointed the FCA keep offering guidance on how to deal with “insistent” clients, when there really is no such thing, or should I say as far as pension freedoms go, if a client wants to follow his own advice then so be it, but im not going to help him do it.

    • I think the correlation is quite clear to be honest. If your advice is absolutely top notch, no questions asked an as such, you charge £1,500 then there is still no point going ahead if the predicted return is only £1,000 for the client. Obviously a very simplified example.

      • What ?
        Sorry Bakes but thats rubbish
        If we all relied solely on predictions from say KFD’s then we need not bother to get up in the bloody morning…..
        As I said; what is the correlation between “cost” 1 and “advice” 2 what ever you charge at point 1, will not and does not compute or effect point 2
        Advice is advice, good and bad, irrespective of cost.

        Only a donkey can put a square peg in a round hole !

        If (In fantasy land) I charged some-one £1,500 to invest £1,000 and the return over 10 years was £5,000, was I to cheap or expensive ? was the advice good or bad ? the client has doubled their money

        Now what if over the 10 years the value was £500, that in most cases would be down to market conditions, the advice still sound and the charge is irrelevent as that was applicable for the work done !

        If I had charged the client £10 for the advice, the outcome is still the same of both one he has made money and one he has lost

        But what does remain the same in all cases is the advice; your either deliver good or you deliver bad…….. what you charge is down to “other” people conclutions as to wether you are cheap or expensive !

        Or on the other hand…… one might have a cystal ball, as for predictions they are not worth the paper they are written on !

        • I do completely agree, i think on the front page of this, its quite easy to understand the correlation but when you delve deeper as to understand how you can apply this it doesn’t apply itself practically. My example was perhaps not the best even though it was drastically simplified. It would be interesting to know your thoughts on the following situation though;
          Client with a pension pot of £30,000 approaches you wishing to put in place FAD and review fund holdings. Standard Fee for this is £1500. Would you not think that the cost of your advice makes the providing of such advice unsuitable purely from a cost perspective. Of course the advice itself might be completely sound but does that mean that the client should proceed regardless of impact financially? Not sure if that makes sense or not, harder to express in writing what i’m thinking than i thought!

          • To my mind … there still is no difference !
            You are still conducting advice and the client is paying for that, I think I know where you are coming from ….. it’s the price ?
            Now the price or cost is no-ones business except client and adviser…… if anyone from the outside then deems that as expensive, that is just their opinion ! And has that really got anything to do with them ? I would argue not !
            But again the only thing that does not change is the advice itself, good or bad it’s not effected by that cost ! Its only peoples opinion that it does or is I.E. that is too expensive for that advice …… but that in itself does not predetermine wether the advice was good or indeed bad, its irrelevant even if a sale/ transaction has been conducted or not !

  6. A Chartered firm charging a few grand for a plan fee and TVA Report, £36k initial and 1% of AUM uncapped fee ongoing (excludes 1% per annum wrap and fund fees) to do the £1.2 million defined benefit transfer? It is happening. How does that make the advice poor? Well, for a start the investment yield required to make the transaction stack up is increased proportionately to the costs. You also must query if this is ‘fair value’ as the CII expect to see. The field is wide open for fixed fee charging whilst still operating at a healthy profit and without fleecing the client. What was the client thinking to agree to such a deal? 3%+1% uncapped – worse than unit trust charging pre-RDR. ‘Luckily’ for these firms, neither the FCA nor the CII are price regulators so firms are charging as much as they can get away with.

  7. Yields, illustrations and predictions ……… if, its and buts were whiskey and nuts we would all have a great Christmas

  8. All that aside, the headline is surely music to the ears of SJP and all its salesmen.

  9. Anyone who thinks the level of adviser’s charges are beyond the scope of the FCA should read the Handbook, COBS Section 6

    Calculation of the cost of adviser services to a client
    COBS 6.1A.16G 31/12/2012

    In order to meet its responsibilities under the client’s best interests rule and Principle 6 (Customers’ interests), a firm should consider whether the personal recommendation or any other related service is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account.

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