The FCA has warned many advisers are not providing clear information on the costs of their services as it reveals the findings of a “wake-up call” thematic review on disclosure of charges.
This week, the FCA published its latest review into disclosure by financial advisers, which found that three in four firms failed to provide the required information on the cost of advice.
The regulator says the level of non-compliance uncovered by the review is “unacceptable” and the findings should act as a “wake-up call” to the profession.
As a result of the review, it is likely to refer two firms – a financial advice firm and a wealth manager – to its enforcement and financial crime division for “egregious failings”.
The review of 113 firms is the second of a three-cycle assessment of how firms have implemented the disclosure elements of the RDR.
The first cycle was published in July and the third will begin in Q3 this year.
The FCA says it expects to see significant improvements in cycle three and will take further regulatory action if firms are still failing to comply with the rules.
The regulator says it was disappointed to see much of the bad practice identified in the first cycle repeated in the second.
It says: “The findings are particularly disappointing as the disclosure requirements are clear and should be relatively straightforward for firms to implement.
“In any industry, there is an expectation the consumer will know what they are going to be charged. Unfortunately the majority of advisers that we checked failed to comply with that basic requirement.”
“We believe that by the start of the second stage of our review, firms had had sufficient time to prepare for and then implement the required changes. So it is concerning firms are continuing to repeat the failings highlighted in the first stage of the project.”
Speaking to Money Marketing, FCA head of investment advisers and platforms Clive Gordon says firms appear to be failing to engage with the regulator’s rules. He says: “In July, we published examples of good and bad practice and a two-page fact sheet summarising the review’s findings. We think that not only are the original rules clear but we have been very helpful to firms in understanding the practical implications of those rules.”
Costs and services
The review found that 73 per cent of firms failed to provide the required information on the cost of advice.
It found that while failings are widespread across the industry, wealth managers and private banks performed poorer than other firms in nearly all aspects. The review found that 58 per cent of firms failed to meet the requirements for disclosing their generic charging structure in initial disclosure documents.
When disclosing client-specific costs, half of firms failed to meet the requirements. One common issue was firms failing to provide the client-specific disclosure as soon as practically possible.
A third of firms failed to meet the requirements for disclosure of their ongoing service, with the most common problem being failure to provide sufficient detail on what the firm’s annual review entails.
FCA technical specialist Rory Percival says firms need to explain whether their review includes only an appraisal of the client’s existing investments and their ongoing suitability or additional elements such as the cost of any necessary fund switches.
He says: “An annual review can encompass all sorts of different things and the value of that might vary from one firm to the next. If firms are not explaining what their annual review entails, it is difficult if not impossible for the client to make a judgement about it.”
The review says the extent of the failings may lead to poor outcomes for consumers and may prevent them from shopping around.
Percival says: “There is the potential for consumers to be misled about what they are paying and what service – and what benefit – they are going to receive.”
Gordon says: “In any industry, there is an expectation the consumer will know what they are going to be charged. Unfortunately the majority of advisers that we checked failed to comply with that basic requirement.
“Putting consumers at the heart of your business means telling them how much they are going to be charged for what service. What is particularly disappointing is this forms a very important part of an adviser’s relationship with their client.”
The review also looked at whether firms are properly disclosing their restricted status.
It published the findings of a separate review last month into whether firms describing themselves as independent are acting as such.
The latest review found that of the 25 restricted firms that it looked at, 31 per cent were not disclosing their restricted status properly.
Some 12 per cent of firms did not disclose that they were restricted while 23 per cent failed to clearly disclose the nature of the restriction and 15 per cent provided contradictory information on the nature of their restriction.
Percival says: “For example, some firms were providing information on the nature of their restriction in disclosure documents that was inconsistent with information on their website, meaning it is not clear to customers what services are really being provided.”
Independent regulatory consultant Richard Hobbs says the review shows firms are struggling to understand what standards the regulator expects.
He says: “That is partly because the FCA has cut firms some slack over the past year as the RDR rules were new but that means it now needs to communicate very clearly what it expects.
“A lot of advisers are scared of having hard-edged conversations about costs right at the beginning of the advice process as they worry it will scare customers off. In the private banking and wealth management sector in particular, there is a cultural reluctance to discuss costs in this way.”
Apfa director general Chris Hannant says the findings of the review are “surprising” as he believes the FCA has provided sufficient clarity on the rules.
He says: “It is in advisers’ interests to fully explain the service they provide to clients.
“The FCA’s tolerance for non-compliance will be even lower when it reviews these issues again so firms must revisit this and get their act together.”
Disclosure review: the key findings
- Initial disclosure documents The review found that firms using a percentage-based charging structure did not provide examples in cash terms, particularly for ongoing fees. The majority of firms using an hourly rate did not provide an approximate indication of the number of hours that each service was likely to require.
- Client-specific disclosure Many firms failed to disclose percentage-based fees in cash terms and to provide the disclosure as soon as possible. Wealth management and private banks performed particularly poorly in this area, with over a third of these firms failing to provide any client-specific charging disclosure.
- Ongoing services A fifth of firms failed to explain what service a client would receive in return for an ongoing fee. Many firms also failed to disclose that the client could cancel the ongoing service and many of those using a percentage-based fee for their ongoing service failed to disclose that the fee would increase as the fund grows.
- Restricted status Firms failed to provide consistent and clear information regarding the nature of their restriction while 19 per cent of restricted firms did not use the word “restricted” in their disclosure.
ADVISER VIEW: Aj Somal
An annual review can vary significantly from a five-minute phone call to an hour-long face-to-face meeting. A lot of firms have been slow to react to the changes of the RDR and those which know their charges are uncompetitive may be deliberately shying away from discussing costs with clients upfront.
Aj Somal is chartered financial planner at Aurora Financial Planning
EXPERT VIEW: Phil Billingham
It is clearly worrying that the FCA is concerned about such a critical area of post-RDR compliance.
However, from reading the review, watching the video from FCA technical specialist Rory Percival published alongside it and comparing it with the first cycle of the review in July, it seems the FCA is clarifying internally and externally what it expects from firms. The regulator is distilling down those expectations into clear steps it expects advisers to take:
Step one: Clear disclosure of “scope of services”. This is the independent or restricted conversation
Step two: Set out clearly the services you will offer, especially ongoing services. Put flesh on the bone, particularly around the review process
Step three: Have a clear, generic description of the way you charge, using cash examples and explaining how it can vary
Step four: As soon as you practically can, set out to the client their specific charges as it relates to them. The use of a professional client engagement letter is a good way to do this.
We are seeing long-awaited clarity from the regulator, to which the industry should respond positively.
Advisers should read the FCA papers on cycle one and cycle two of the review, watch the video and think about it from the client’s viewpoint.
Phil Billingham is director at The Phil Billingham Partnership