The Financial Conduct Authority (FCA) has found “unacceptable” failings with advisers’ disclosure of their fees and status and is planning to turn up the heat on firms to get it right. What do advisers think went wrong?

One financial advisory business is “likely” to be referred to the regulator’s enforcement division for failings related to charges disclosure.

What did the FCA do?

The Financial Conduct Authority (FCA) has been assessing firms’ compliance with rule changes introduced at the end of 2012 following the Retail Distribution Review (RDR). = http://www.fca.org.uk/news/thematic-reviews/tr14-6-supervising-retail-investment-firms

This was the second element of what is expected to be a three-part probe. = http://www.fca.org.uk/your-fca/documents/thematic-reviews/tr13-5

1. What was it looking for?

a. The main point of this latest tranche of the FCA’s review was to look into charges disclosure – do clients know what they’re paying, in cash terms, for initial advice and ongoing services? Are they aware fees could climb under a percentage model?

2. How it did it?

a. We’ll leave it up to you to decide whether this is a large-enough sample, but the FCA asked for information from 113 firms from a cross-section of the industry and carried out follow-up assessments on a sample of them.

b. All firms were asked to complete an online questionnaire and submit a copy of their disclosure documents.

c. Independent firms were also required to share copies of their new business registers.

3. An important point.

a. One of the key failings the FCA identified – that of disclosing a client-specific cost of advice – had little to do with traditional advisory businesses.

b. Indeed, more than a third of private banks and wealth managers among the regulator’s sample “failed to provide any client-specific adviser charging disclosure”.

4. So what were the key findings?

a. The FCA’s main concerns fell under four headings: initial disclosure documents; client-specific disclosure; ‘other’ charging issues; and the disclosure of ongoing services. Here’s a more detailed breakdown…

b. Initial disclosure documents.

c. The FCA said 58% of firms failed to meet the requirements for disclosing their generic charging structure. A key issue among the firms surveyed was that those using a percentage-based charging structure did not provide examples in cash terms within their initial disclosure document (24% failed to disclose their initial fees and 30% failed to disclose their ongoing fees).

d. Meanwhile, 73% of firms that used an hourly rate did not provide an approximate indication of the number of hours that the provision of each service was likely to require. Also, 62% of firms that used an indicative hourly rate did not provide the basis on which it may vary.

e. Elsewhere, 45% of firms that offered more than one option of calculating the fee within their charging structure did not made it clear what basis would be applied and when.

f. Client-specific disclosure.

g. Half of all firms sampled failed to meet the requirements for disclosing client-specific costs, the regulator said.

h. The key issues for the firms surveyed were, again, that some did not disclose the fee in cash terms (24% failed to disclose this in relation to initial fees while 41% failed to make the proper disclosure in relation to ongoing fees). Additionally, 22% of firms surveyed did not appear to provide the client-specific disclosure as soon as practicable.

i. However, it said this failing was mainly concentrated within the wealth management and private banks’ category, as 36% of those firms “failed to provide any client-specific adviser charging disclosure”.

5. ‘Other’ charging issues.

a. More than half (58%) of firms failed to meet other important requirements in relation to the disclosure of their charges, the FCA said. The key issue for the firms surveyed were that 40% of firms using a percentage-based charging structure for their ongoing service failed to disclose that the fee would increase as the fund grows.

6. Disclosure of ongoing services.

a.The key failing here, the regulator found, was that 34% of firms failed to meet the requirements for disclosing their ongoing service. One in five firms’ documents, it said, failed to clearly disclose what service a client would receive in return for the ongoing fee.

7. Why is this a problem?

a. The FCA said the failings identified by its review “suggest some consumers could be unaware of, or even misled, in relation to thecost of advice”. The same is true of the type of service offered by a firm, the nature of a firm’s restriction, and the service they can expect to receive in return for the ongoing fee.

8. Time’s up.

a. The FCA said it will embark on the third leg of its RDR impact review in the third quarter of the year, but it had a word of warning for firms. As well as probably referring two firms to enforcement for “egregious” failings, it said more could follow suit unless it sees an improvement: “By the point the third cycle of our review takes place, firms will have had more than adequate time to comply with these rules. If we identify firms that are still failing to meet the disclosure requirements, we will consider what further regulatory tools are appropriate, including referrals to enforcement.”

b. Read the FCA charges disclosure fact sheet here  http://www.fca.org.uk/your-fca/documents/fca-factsheet-no-007