Published by the FT’s Financial Adviser 1 May 2014
On 31 December 2012, the FSA introduced new rules to implement the RDR requirements for firms making personal recommendations to retail clients in relation to retail investment products.
These included the new adviser charging rules. For all relevant rules and guidance, firms should refer to the FCA Handbook (in particular, COBS 6.1A and COBS 6.2A).
In July 2013, the FCA published findings from the first part (TR13/5) of a three-stage thematic review to assess how firms have implemented the RDR.
The first-stage findings acknowledged the progress firms had made but highlighted areas where further improvements were necessary, including giving examples of good and poor practice.
After publishing these findings to the sector, the FCA was expecting to see standards improving.
More recently the FCA has completed the second stage of its thematic review, which focused on whether firms describing themselves as independent are acting independently in practice (TR14.5 published on 20 March 2014), and whether firms are complying with the disclosure requirements (TR14/6 published in April 2014). Only 113 firms formed the sample for the second stage.
The results of the disclosure review were disappointing for the regulator, in that a high proportion of firms were found to be failing to correctly disclose to clients the cost of their advice, the type of service they offer (independent or restricted), and the nature of the ongoing service they provided.
Clive Adamson, director of supervision at the FCA said: “RDR has involved a major change to the investment advice landscape. While we have seen a lot of positive progress and willingness by advisers to adapt to the new environment, I am disappointed with the results of our latest review looking at whether advisers are clear with their customers on costs and services provided.
Frankly, it seems the FCA believes that the industry has had plenty of opportunity to implement the RDR and its patience is now being stretched
“We will be helping the industry again to understand our requirements with the release of a video guide but these results are a wake-up call and we expect the industry to respond.”
The review on adviser charging revealed that 73 per cent of firms in the sample failed to provide the required generic information on how they charged for advice and/or failed to clearly confirm the specific cost of advice to their individual clients in a timely manner.
The FCA stated that firms have had sufficient time to prepare for and implement the required changes and as a result some enforcement action is imminent.
This general lack of transparency and failure to follow what are relatively straightforward requirements will have some influence on how the FCA will conduct the third cycle of its thematic review.
By that time, firms will have had more than adequate time to comply with the rules, and the FCA has said that if it identifies firms that are still failing to meet the disclosure requirements, it will consider further referrals to enforcement.
Bearing in mind the high percentage of failure to comply with the RDR requirements, the FCA may choose to escalate and expand this thematic review into the successful (or not) implementation of the RDR. The sample taken was very small and the FCA may choose to extend the sample size if it considers further investigation appropriate.
Firms have had plenty of guidance on what is expected of them, including the production of some very helpful factsheets, a video, FAQs and several consultation papers.
Frankly, it seems the FCA believes that the industry has had plenty of opportunity to implement the RDR and its patience is now being stretched. While the failings appear to be widespread across the sector, the FCA states that wealth managers and private banks have performed more poorly than other firms in nearly all aspects.
What should adviser firms have been doing to ensure compliance with the adviser charging requirements? First, firms should have long ago reviewed their client bases and should have:
The FCA states in TR14/6 that the generic disclosure document is key in ensuring clients have a clear understanding of the firm’s charging structure.
This should include information such as to how firms typically charge for advice (for example, a percentage of the amount invested, an hourly rate, or a fixed fee) and the level of the fees.
If a firm is charging a percentage of the amount invested, it is important that it includes examples in cash terms, and if it is charging an hourly rate, it must provide an approximate indication of the number of hours the provision of each service is likely to require.
This information must be given to each retail client in writing in good time before making the personal recommendation (or providing related services), and its purpose is to ensure that clients can shop around if they wish (see COBS 6.1B.5).
A firm must agree with and disclose to a client, as early as practicable, the total adviser charge payable to it or any of its associates by a client. This should include when the payment is due and the frequency of each payment, if more than one.
The total adviser charges can be included in the suitability report. If an ongoing adviser charge is expressed as a percentage of funds under management, the disclosure must clearly state that the adviser charge may increase as the fund grows.
If there is an ongoing service, details must be given about the service, its associated charges, highlight if these charges may fluctuate, be clear when such charges will be incurred and how the client can cancel the service and cease payment of the associated charges. In effect, there must be no surprises for the client (See COBS 6.1A).
Firms should ensure that they provide the cost of advice information in a clear and timely manner and before clients are committed to paying any fees.
In practice, it makes good sense (from a contract enforcement perspective) to ensure that all the relevant adviser charging information is delivered to each client in a form of client retainer and standard terms of business, and to document receipt by each client of this information.
Firms should ensure that their client inception functions provide for the delivery of this information at the outset of the relationship, use readily accessible templates and have effective procedures to ensure advisers cannot proceed with any advice until the disclosures have been given.
This problem is not the sole preserve of financial advisers – other professionals have been subject to similar regimes.
Despite it being an established regulatory requirement for solicitors to provide the best information about costs to clients at the outset and on an ongoing basis, the legal ombudsman still receives its fair share of complaints about deficient costs information.
One final point is the fact that the FCA has identified that 31 per cent of the firms reviewed that operated a restricted model did not make this clear to their clients.
Bearing in mind this information can be easily incorporated in standard terms of business, there is little excuse for this failure.
It is possible that the FCA will escalate action if firms do not get on with completing implementation of the adviser charging requirements soon.
Philip Ryley is a solicitor and partner at law firm Michelmores LLP