The FCA is set to undertake further work on charges disclosure and the independent and restricted advice labels after publishing the third and final cycle of its post-RDR thematic review.
While the FCA has praised the industry for making good progress, it has set out a number of areas of concern, including disclosure of costs and the suitability of ongoing services.
The FCA says the findings of its third thematic review on adviser charging provide “further evidence of the increasing professionalism of the financial advice sector”.
It says it found a “material improvement” in the way firms disclose the cost of their advice, their scope of service, and the nature of their services to clients.
The regulator says this suggests firms have responded positively to the findings of the second cycle of the review in April, which warned many advisers were not providing clear information on the costs of their services in what it described as a “wake-up call” to the industry.
More widely, the FCA says there are “encouraging signs” the RDR is on track to achieve its objectives.
It points to reduced product bias, with a decline in sales of products which paid higher commission pre-RDR, and an increase in the number of advisers obtaining qualifications which go beyond the minimum requirements.
The Personal Finance Society says 4,300 advisers have achieved chartered status, with a further 7,500 individuals working towards the qualification.
PFS chief executive Keith Richards says: “There is clear evidence of the progress being made by the advice profession. This review is consistent with key messages coming from Canary Wharf recently that professionalism is evident and the sector continues to respond positively to reforms.”
EY senior adviser Malcolm Kerr adds: “It will not be long until the majority of investment advisers have achieved chartered status. The industry deserves a big tick for professionalism.”
The FCA also praised the industry’s greater focus on providing ongoing services, and notes that consumer research carried out by NMG shows the importance customers place in the ongoing element of advice.
However, the FCA says it remains concerned some firms are failing to provide clients with clear disclosure of their ongoing charges in cash terms.
The review found 35 per cent of firms did not disclose the total adviser charge for their ongoing services in cash terms relevant to the individual client, compared to 41 per cent in cycle two. This normally applies when the firm is using a percentage-based charging structure.
The FCA says: “As this was one of the main failings in both of the previous review cycles, we are disappointed a significant proportion of firms continue to fail to disclose the ongoing adviser charge in cash terms for individual clients.”
It also found that of the firms using hourly rates within their charging structure, 57 per cent did not give an estimate of how long each service was likely to take, compared to 73 per cent in cycle two.
The review also found 23 per cent of firms use wide ranges in their generic disclosure, for instance, stating that they charge between £X and £Y for a financial planning report.
The FCA says where there is a lack of clarity it can be difficult for the client to be clear about the likely cost.
Research carried out by Europe Economics and published as part of the review also raised concerns that poor disclosure may be preventing consumers from shopping around.
Europe Economics says: “The complexity of charging structures and the manner in which this information is communicated may increase consumer search costs and limit the effectiveness with which consumers engage with the market.
“One implication of this is consumers are less likely to be able to shop around effectively for an adviser and in doing so drive down competition between advisers.”
But Institute of Financial Planning chief executive Steve Gazzard says cost disclosure “is not as simple as the FCA would like”.
He says: “The FCA thinks in terms of product, and at face value a cost to advise on setting up an Isa might be relatively simple to calculate and disclose. However, most of our members work on a more holistic basis and it is far more difficult to calculate the costs of this until after the first meeting with the client.
“If the market is reduced to competing on fees it will be the cheaper and weaker service offerings that may take the majority of business which would not be a great outcome.”
Speaking to Money Marketing, FCA director of long-term savings and pensions Nick Poyntz-Wright says: “A number of firms provide an hourly rate, which is something you could potentially compare between different firms.
“But consumers have very little idea how long a particular piece of work is going to take, so the adviser is not thinking about how to put this in a way the client is able to understand how much they are likely to pay. Sometimes it is not until the end of a piece of work they find out how much the total cost is. The adviser is then building up risk because there is a misalignment of expectations.”
The thematic review also identified issues with some firms’ ongoing service offerings, finding some services were not sufficiently linked to customers’ needs. It found in a small minority of firms, one of the ongoing service levels offered to clients only included administrative duties linked to the initial advice and the maintenance of client records.
The FCA says: “We were concerned these tasks did not constitute a genuine ongoing service and firms were therefore failing to treat these clients fairly.”
Of further concern is a suggestion by Europe Economics that advisers have used the RDR to increase the cost of advice despite lower product charges.
The research found that product charges have fallen over the last two years, but says the impact of the RDR on the total cost of investment remains unclear.
The report says: “There is evidence that adviser charges have increased in some cases (certainly, there is no notable evidence to suggest that these have fallen), and lower product charges may not offset this.
“There is also the possibility that some advisers are channeling more of their clients’ portfolios to lower-charging (that is, passive) funds in order to keep total costs to clients low, rather than reducing their own charges.”
But Clarke Robinson & Co managing director Steven Robinson argues: “The RDR has increased the cost of business to advisers. They have to either pass the cost of that on to clients, or absorb it themselves.”
One advice firm has been referred to enforcement action as a result of the review, with the FCA saying the firm has not “sufficiently engaged with the changes the RDR requires”. The firm’s failings relate to disclosure and ongoing services.
The regulator also singled out wealth managers for particular criticism.
It says too many wealth management firms operating on a percentage charging basis are failing to provide examples in cash terms in their generic charging structures.
The industry-wide failings in this area are 15 per cent for initial charges and 18 per cent for ongoing charges, but the equivalent figures for wealth management firms are 36 per cent and 50 per cent respectively.
The industry can also expect further scrutiny from the regulator over the coming years.
FCA head of investment David Geale says: “The RDR was a generational change and we are only two years in, so it is early days. This is the first stage of the post-implementation review and there are encouraging signs but some areas where we need to do further work.”
The FCA says it will look at improving disclosure to consumers early next year, and will undertake a further review of how effective the RDR has been in 2017.
Chief executive Martin Wheatley says: “It is vital we continue to keep these wide-ranging reforms under review.”
The FCA’s work next year will include looking at how behavioural economics can improve consumers’ understanding of the cost of advice, and a consultation on the independent and restricted advice labels.
The FCA has conceded consumer understanding of the labels is “limited” and they are unlikely to have the desired effect.
It is asking for stakeholders’ views on better ways to present information to consumers on the nature of advice services. One idea is to develop a proposal put forward by the Smaller Business panel to introduce a “simple label” that explains the scope of the firm’s advice.
The Europe Economics research found a lack of understanding of the labels by consumers could prompt more advisers to go restricted, suggesting consumers will be worse off as a result.
It says: “A lack of appreciation by consumers for the services provided by independent advisers may undermine the incentives of these advisers to improve the quality of their advice, or else increase the attraction of the restricted model to them.”
Chartered financial planner
Griffin Wealth Management
There remains a lack of consumer awareness over independent and restricted advisers, which is unfortunate because the FCA introduced the terminology to help consumers choose. I am surprised levels of disclosure are still so poor in some areas; in the world of transparent structures, we should be disclosing everything.
The RDR has been beneficial to us as a firm and to clients. I don’t think there’s necessarily anything wrong with an increase in charges, as the FCA is surely not expecting us to turn into charities. But there is a question over whether consumers are getting more value than before to reflect the higher charges.