With the aim of improving the client experience and reducing the regulatory burden on authorised firms, the Financial Conduct Authority (FCA) has announced plans to withdraw four disclosure documents that it describes as “ineffective communication requirements”.
The regulator points to previous behavioural economics research that suggests overloading clients with information can lead to poor decision making.
Firstly, the FCA plans to withdraw the Initial Disclosure Document (IDD), and the associated Combined Initial Disclosure Document (CIDD). These are documents that firms in the mortgage and insurance sectors can use to explain the extent of the services they provide, and how much these services will cost.
Secondly, the proposal contains a similar plan to scrap the Services and Costs Disclosure Document (SCDD), which is equivalent to the IDD and CIDD, but is used by firms providing investments, or who give advice in this area.
Advisory firms, and providers in the insurance, mortgage and investment sectors, should note however that there are no plans to change the FCA’s rules on what information needs to be disclosed to the client. In its consultation paper, the FCA highlights the need to use effective disclosure documents when it comments:
“We are concerned that [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][the IDD, CIDD and SCDD] templates create a risk that firms adopt a ‘tick-box’ approach to their disclosure obligations rather than designing an effective disclosure to help their target customers understand the scope and cost of their service.”
The IDD, CIDD and SCDD were simply one way that firms could have addressed the need to provide the necessary information. The best way for firms to provide the information about how they will do business with a client is via a Client Agreement, Terms of Business letter or similar.
For example, a Client Agreement for an investment advisory firm should include:
• The scope of the service to be provided. Firms should indicate: whether they are independent or restricted, whether they offer advice on all types of investment product or not, and whether they can consider products from all providers
• Its advice process – e.g. fact finding, followed by research and a presentation meeting
• The fee charging method (s) the firm uses
• The level of ongoing service the firm will provide to its clients
Strictly speaking, it will still be possible for firms to issue a disclosure document that uses the same format as the IDD, CIDD or SCDD. However, if a firm chooses to do this, it must no longer use the FCA’s Key Facts logo on the document.
The FCA also plans to end the requirement for with-profits pension providers to supply a document known as the ‘Consumer-Friendly Principles and Practices of Financial Management’ – where they explain how they manage the with-profits fund – and for fund managers of certain retail investments and collective investment schemes to produce a ‘Short Report’ – a six monthly report on fund performance.
Christopher Woolard, director of strategy and competition at the FCA, said:
“We would like to see firms changing the way they interact with their customers. We have been encouraged to see a number of firms are already doing this.
“Today’s announcement reflects our commitment to sustainable regulation and addresses disclosures that are not working for consumers, giving firms the freedom to communicate with their customers in a more flexible and open way.”
A consultation on the proposals has commenced and will continue until December 18 2015.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.