The Financial Conduct Authority (FCA) has revealed some rather negative findings in its latest thematic review into implementation of the Retail Distribution Review (RDR). This latest study focuses on whether firms correctly disclose charges and other matters at the start of the advice process. The FCA says that 73% of the 113 firms surveyed failed to meet at least one of the requirements regarding disclosing the cost of advice. In the executive summary to its report, the FCA describes this as “unacceptable”.
The RDR came into force on January 1 2013, and amongst the changes was a ban on FCA-regulated firms receiving commission payments for investment advice. Now that the only way these firms can be remunerated is via client fees, there is an increased focus on whether firms clearly explain the charging structure. Fee charging structures are typically explained in a client agreement, terms of business letter or other document, which needs to be provided on the first occasion the adviser meets a client.
Advice charges might include an initial fee, paid at the time the advice is given; and ongoing charges, paid at set intervals in the future, e.g. annually.
In 58% of firms, there were issues with the generic cost of advice information provided. 50% of firms were insufficiently transparent as to what costs would be for individual clients. 58% did not give sufficient ‘additional information’, such as that ongoing advice fees may fluctuate. 34% did not clearly describe the nature of the service they offer in return for the fee, or did not inform clients of their right to cancel ongoing advice fees.
Separate to the issue of fees, 31% of firms claiming to offer a restricted advice offering were not clearly informing clients as to the nature of the restriction.
Wealth managers (financial advisers who give investment advice) and private banks were said to be the worst offenders.
Some of the key issues firms should note include:
- If fees are calculated as a percentage of the investment amount, a cash example should be given, such as what 3% of £80,000 is
- If fees are charged on an hourly rate, the information provided should include an estimate of the number of hours each part of the service is likely to take
- If ongoing fees are calculated as a percentage of the investment amount, it should be made clear that this amount will fluctuate in line with the performance of the investment
- If the firm has two or more fee charging methods, it should be made clear whether clients have a free choice between these methods in all circumstances, or else in what circumstances each method applies
- It should be made clear when ongoing advice charges will commence
- If an ongoing service is required, firms need to have robust procedures to ensure that this advice is delivered to the standard promised to the client, and at the correct times
Two unnamed firms – one financial adviser and one wealth manager – have already been referred to the FCA’s Enforcement Division as a result of issues identified during the review. The FCA warned that more firms would be referred for possible disciplinary action if improvements were not evident by the time it conducts its next study in the third quarter of 2014.
Clive Adamson, director of supervision at the FCA, said he was “disappointed with the results,” and urged firms to improve standards. “These results are a wake-up call and we expect the industry to respond,” he added.