The Financial Conduct Authority (FCA) is currently doing a three-stage thematic review to assess firms’ overall approaches to changes following the Retail Distribution Review (RDR). It has completed the first stage and, today, it published its report.
Here, IFAonline picks out ten key things the FCA uncovered…
1 General findings
The FCA is happy. Though it has some concerns (see all remaining points!), it said firms have made “a lot of progress”. Generally, it said, firms had acted to implement the new requirements and were open to its feedback. “We were pleased to see that many firms’ propositions were in line with the new rules. Some firms had also tried to make their disclosure material clear and engaging,” it concluded. This is a bit of a hat-tip to all those firms who engaged with the RDR process. However, there were some areas of concern…
2 The use of cash terms
Communicating charges in pounds and pence significantly helps consumer understanding, the FCA found, so, since the launch of RDR, firms have been required to disclose their charging structures both in writing and, where possible, in cash terms.
Though most firms are doing this, the FCA said some aren’t. A key finding was that, though the adviser charge for the initial advice was in cash terms, the ongoing adviser charge was not. This typically applied to firms whose ongoing charge is a percentage, for example 0.5%, of the amount invested, the FCA said.
Example of good adviser charge disclosure
One firm that had a flat percentage charging structure provided a range of cash examples linked to how much a client wanted to invest. It gave scenarios of investing £20,000, £50,000 or £100,000. We felt that a client who had this information would be better able to understand what the costs are likely to be for their particular financial situation than if they had a single example that might not be so relevant.
3 Hourly rates
The FCA said it found some firms’ charging structures that included hourly rates did not provide sufficient information for a client to understand the likely, final cost to them. According to the regulator, clients won’t necessarily understand what the approximate cost may be to them for the advice unless there is an estimated indication of the number of hours it will take to provide the service. The FCA implied firms were not providing this information.
4 ‘In good time’
Under RDR disclosure rules, firms must provide clients with their generic charging structures in good time before making a personal recommendation. This should allow a client to make a judgement on the value of the service to be provided.
Most firms the FCA assessed either explained their charging model at the initial meeting or before it. The FCA liked that. However, one firm (yes, just one) did not provide its charging structure until the second meeting, at the same time as delivering its recommendation. “We felt that this did not put the client in an informed position early enough in the advice process,” the FCA said.
5 Instalments
The FCA found two firms that allowed clients to pay the adviser charge for advice on a single premium product by instalments. Slapped wrists. As the FCA pointed out, since RDR, advisers should be clear that they cannot charge for advice on a single premium product by instalments. Since the end of last year, clients can only pay by instalments for advice on regular contribution investments.
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6 Independence
So, here’s the rule: if a firm offers independent advice to retail clients on retail investment products, the advice should be free of any bias or restriction. If there is a restriction or bias – either by provider or product – the adviser must disclose that the advice provided is restricted and explain the nature of the restriction. So…yep, you guessed it, not all firms are disclosing their services correctly.
Some firms either said they were independent when they were not, while others said they were restricted but, it seems, were a little coy about the nature of the restriction. One firm did not use the word ‘restricted’ in its disclosure, while another firm stated it offered ‘restricted advice’ with no further explanation.
Another firm, meanwhile, explained that its advice was restricted but did not sufficiently disclose the nature of the restriction. The firm’s advisers each had a different restriction by provider or product type, so it could not generically disclose the nature of its restriction as it had no set or defined restricted status.
7 Ongoing service
Clients should be able to make an informed decision about whether they wish to take up or cancel a firm’s ongoing service. However, not all can, the FCA said, because of limitations in some firms’ explanations.
As the FCA noted, most firms included a review as a part of their ongoing service, but some did not clearly explain what the review would include or whether it was automatic or the client needed to request it. One firm used the term ‘terminating the agreement’, but the FCA deemed this insufficient.
8 Contingent charging
A number of the firms in the FCA’s review sample charged on a contingent basis. If a firm operates such a business model, the regulator said it considers this to be a higher-risk approach than a time-cost charging model due to the need to sell products to generate revenue (you may recall FCA chief executive Martin Wheatley [pictured] expressing this sentiment at a meeting last week. If you can’t, read this).
Firms operating contingent charging should ensure they have adequate controls in place to manage this risk, the FCA said, though, oddly, it did not suggest firms were failing at this. Perhaps it was just helpfully pointing it out.
9 Pretty in pink
Sometimes you wonder what the FCA takes clients for: it recommends documents sent from advisory firms should “include tables” and “use colour”. It was happy with some firms’ documents, but others would not have been particularly clear to clients, it said. Some firms explained their charges and services across multiple documents (not ideal, admittedly), while others used financial language such as ‘relevant market’ and ‘holistic’ which the average client would not understand.
10 Make your own mind up
While the general consensus on some of these findings (but particularly on disclosing independence) seems to be “well, what did you expect?”, you might wish to know that the FCA generated these findings from a sample of just 50 firms. Not every one of them was visited either. Instead, 50 were sent questionnaires and the FCA then later carried out some follow-up visits. We’ll leave it up to you to decide whether this is an appropriate sample size.
With thanks to IFAonline.
