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Time to heed FCA warnings on ongoing service


Earlier this month, the FCA began contacting adviser firms as part of its third thematic review into the RDR. 

It is fair to say the temperature is rising following the previous two reviews, which highlighted serious concerns on the part of the regulator.

In particular, the second review – published in April and entitled Supervising Retail Investment Firms: Being Clear about Adviser Charges and Services – highlighted that over one-third of advisers are failing to provide a clear account of the ongoing service they offer in return for an ongoing fee and/or the client’s right to cancel the service.

For at least two years there has been a bone of contention between advisers and the regulator about what legacy trail commission means in terms of ongoing service.

On one hand, some advisers contend such trail forms part of a deferred initial commission; on the other, the FCA states trail commission is, in its view, a payment for an ongoing service from the adviser to the client. The latter view has won the day and much as advisers may be unhappy with it, subject to a legal challenge (for which there is no evidence), it will be the view that matters.

This behoves advisers to ensure they take note of the FCA’s concerns in its three RDR thematic reviews and, in doing so, also ensure they can demonstrate an ongoing service and that their clients are fully aware of the right to cancel this service.

It is an area which is increasingly perplexing small advisers. The FCA’s second thematic review says: “In addition to disclosing the cost of the ongoing service, it is important that consumers understand what service they can expect to receive in return for the ongoing fee. It is important the description is jargon-free and explained in a manner that a typical retail client would understand.”

The review found 20 per cent of firms contacted by the FCA failed to explain their service clearly.

Even when a clear service proposition is in place, it is essential advisers deliver that service. In small owner-managed businesses, advisers are sometimes distracted by day-to-day management issues, HR, compliance and so on, making it all too easy to allow annual and half-yearly reviews of clients to slip.

In some cases the FCA found the client review on offer was not part of a robust procedure. Over 10 per cent of firms failed on this issue.

Clearly being familiar with the FCA’s views is vital for advisers but they should also take advantage of the support available on the regulator’s website.

Another useful step is for adviser firms to carry out a review of their own business, which need not be unduly expensive. Knowing the physical limitations on what a firm can deliver will ensure that the service offering is achievable.

If there are two advisers in a firm with 500 clients to whom annual reviews have been promised, this will involve, say, one hour of face-to-face time per review and two to three hours of follow-up work – say 2,000 hours of work a year.

In a working year of 220 days, this could be quite a stretch. The conclusion may be to offer less frequent reviews as not every client will need a review each year. 

Reducing the number of clients could be another option and has worked well for some firms. Other solutions may involve reviewing the roles and responsibilities of the people in the business, increasing automation in the back office or offering a web-based service.

Clients, particularly newer clients, are increasingly demanding to know what they will get in return for the fees they pay. Responding to these demands should be a matter of good business sense. 

Good business practices will inevitably lead to good client experiences so it is difficult to see how, in turn, these could be a cause of concern for the regulator.

The FCA’s second review also contains the following observation: “By the point the third cycle of our review takes place, firms will have had more than adequate time to comply with these rules.

If we identify firms that are still failing to meet the disclosure requirements, we will consider what further regulatory tools are appropriate, including referrals to enforcement.”

You have been warned.

Richard Leeson is chief executive of Adviser Advocate



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