The Financial Conduct Authority (FCA) has reportedly contacted 45 advisory firms to ask for more information on their charging structures. It is understood that the sample includes large and small firms alike, as well as both independent and restricted advisers.
This follows the FCA’s comprehensive review of more than 1,000 cases from approximately 650 firms, the results of which were published in May of this year. The review was widely described in the media as the regulator’s ‘suitability review’, yet the main criticisms levelled at firms centred around disclosure rather than suitability of advice.
In 93.1% of the reviewed cases, it believes that the firm’s advice was suitable. In only 4.3% of cases was the advice deemed to be unsuitable, and in the remaining 2.5% of cases the advice was unclear – there was not enough information on file for the reviewer to know for sure whether the advice was suitable.
Where advice was identified as being unsuitable or unclear, the FCA says that the main areas of concern were: whether clients’ risk profiles were being correctly identified, and replacement contracts being recommended where clients were advised to give up valuable benefits and/or incur higher costs without good reason.
However, the FCA found less encouraging results when it looked at the standard of disclosure in the files it reviewed. In just over half of cases (52.9%), the FCA considered that its disclosure requirements had been met, however the standard of disclosure was “unacceptable” in a significant minority of cases (41.7%). In 5.4 of cases it was “uncertain” whether the disclosure rules had been complied with.
Disclosure standards were noticeably poorer in smaller advisory firms, in independent advice firms (as opposed to those offering restricted advice) and in directly authorised firms (as opposed to firms who are members of advice networks).
Two specific areas of concern regarding disclosure were mentioned by the FCA in its report: some firms operating an hourly charging structure are not providing clients with an estimate of how long each service is likely to take, and some firms are using charging structures which have a wide range of possible charges. The latter could result in confusion for clients.
Additionally, it is of course vitally important that firms provide the service they promised to deliver in exchange for payment of a fee.
The FCA has promised to undertake a ‘communication programme’ with firms on the issue of disclosure, and to issue examples of good and poor practice in due course.
Firms concerned about whether they are meeting FCA standards on suitability and/or disclosure are urged to discuss the matter with their compliance consultant.
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.