Earlier this year, the FCA published two papers that considered the results of the second round of its thematic review looking at RDR implementation. The review was based on information gathered from 113 firms from across the industry, with a follow-up assessment on a sample of them. Both papers highlighted failings.
The findings of the first paper, Supervising retail investment firms: delivering independent advice, were encouraging, showing the majority of firms had understood the new requirements around independence. But they also found other firms had not engaged with previous FCA guidance are were not meeting regulatory requirements.
The most common failings were:
- not considering and/or having the ability to advise on all retail investment products
- adopting a single platform and not carrying out due diligence on the other options available, and/or not considering off-platform investments
- referring clients to other advisers (either externally or in-house) for advice on certain RIPs
- networks failing to ensure all appointed representatives met requirements on independence.
The results of the second paper, Supervising retail investment firms: being clear about adviser charges and services, were less encouraging.
Disclosure rules require firms to provide clients with generic information at the outset of the advice process, followed by confirmation of how much the advice will cost them as individuals.
The findings showed 73 per cent of firms failed to provide the required information in at least one of the areas specified. The FCA found:
- failings around upfront generic information on how much advice might cost
- failings around how much advice would cost clients as individuals
- firms failed to give additional information on charges, for example, not highlighting that ongoing charges may fluctuate
- firms offering a ‘restricted’ service were not being clear that they were restricted, or the nature of the restriction
- firms failed to explain clearly to clients the service they offer in return for an ongoing fee and/or their right to cancel this service.
It would be interesting to know how many of the firms involved in the review were using the FCA templates to disclose the information and how many had created their own documents.
One could also ask why so many firms had failings in these areas. This is surely not deliberate so perhaps the regulatory guidance around these areas is not clear.
The FCA has expressed concern at the findings and will conduct a third cycle of the thematic review, starting in mid-July. This gives firms just a few weeks in which to make any changes necessary. Even if you think you are complying fully, we urge you to review your disclosure documentation and procedures to ensure they are in line with the rules.
The rules around information about the firm, its services and remuneration can be found in Cobs 6, with Cobs 6.3 specifically covering disclosing information about services, fees and commission. Firms can choose to use the FCA’s templates or create their own documents from scratch, ensuring the mandatory information is included.
There are two FCA templates: firms can select from a services and costs disclosure document or a combined initial disclosure document, which includes investment, insurance and home finance/mortgage business. Notes are attached to aid completion as these must be specific to each firm.
However you decide to create your documents, the FCA expects firms to help clients understand how much advice is likely to cost and the service they can expect in return.
The regulator has also made available on its website a short template with a supporting note that acts as a prompt when reviewing disclosure documents. It highlights what questions you should be asking around charging structures and your service offering, whether your firm is independent or restricted.
The FCA has indicated increasing intolerance for non-compliance, so we are likely to see regulatory action if there is no improvement in this third round of thematic work.
Linda Smith is senior technical adviser at Apfa