19May

The Financial Conduct Authority (FCA) has revealed some negative findings in its latest thematic review into implementation of the Retail Distribution Review (RDR). The 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’.

Understanding the Retail Distribution Review (RDR)

The RDR came into force on January 1 2013. Amongst the changes was a ban on FCA-regulated firms receiving commission payments for investment advice. As the only way for these firms to receive compensation firms is through client fees, there is an increased focus on whether companies are explaining the charging structure clearly. Firms often discuss fee charging structures in a client agreement, terms of business letter or other document, which they need to provide 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.

Learning About Common Industry Problems

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 provide a restricted advice offering were not clearly informing clients about the nature of the restriction.

Wealth managers (financial advisers who give investment advice) and private banks were said to be the worst offenders.

To help businesses, we have created a list of issues firms should remember:

  • When computing fees as a percentage of the investment amount, a cash example should be given, such as what 3% of £80,000 is.
  • When charging fees 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.
  • When computing ongoing fees as a percentage of the investment amount, it should 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 clear whether clients have a free choice among these methods in all circumstances or in what circumstances each method applies
  • It should be clear when ongoing advice charges will commence
  • When the client needs ongoing service, firms must have robust procedures to make sure they deliver advice to the standard promised to the client and at the correct times.

The FCA has already referred two unnamed firms – one financial adviser and one wealth manager –to their Enforcement Division due to issues identified during the review. The FCA warned that more firms might receive possible disciplinary action if the agency does not see improvements 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.

For more information on IFA compliance, send us a message or give us a call at 0845 154 6724.