Too many advisory firms are not being clear with consumers on how much advice costs, the type of service they offer (whether it is restricted and the nature of the restriction) and what on-going services they provide. The Financial Conduct Authority’s (FCA) latest review into disclosure by financial advisers found that 73 per cent of firms failed to provide the required information on the cost of advice.
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 advisors to adapt to the new environment, I am disappointed with the results of our latest review looking at whether advisors are clear with their customers on costs and services provided. 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 latest review is the second of a three-cycle assessment of how firms have implemented the disclosure elements of the Retail Distribution Review (RDR). The RDR, which came into force at the beginning of 2013, introduced new disclosure requirements to improve transparency for consumers. The aim was to ensure that consumers have the information needed to make informed decisions, and are clear on the costs and services of advisory firms to improve competition in the market.
The first cycle of research was published in July 2013 and found that progress had been made and there was a general willingness to adapt to new rules. However, common issues were uncovered and further examples of good and poor practice were produced to help firms.
However, in the latest research, despite sufficient time and the straightforward nature of the requirements, issues remain. In particular, the second cycle found that:
- 58% of firms failed to give clients clear upfront generic information on how much their advice might cost
- 50% of firms failed to give clients clear confirmation on how much advice would cost them as individuals
- 58% of firms failed to give additional information on charges, for example not highlighting that on-going charges may fluctuate
- 31% of firms offering a ‘restricted’ service (they cannot advise on the full range of financial products and providers available) were not being clear they were restricted, or the nature of the restriction; and
- 34% of firms failed to give clients a clear explanation of the service they offer in return for an ongoing fee and/or their right to cancel this service.
Whilst failings appear widespread across the industry, wealth managers and private banks performed poorer than other firms in nearly all aspects.
The failings identified in the FCA’s review suggest some consumers could be unaware of, or even mis-led, in relation to the cost of advice (both initial and ongoing), the type of service offered by a firm (i.e. whether it’s independent or restricted), the nature of a firm’s restriction (if applicable), or the service they can expect to receive in return for the on-going fee.
The FCA will be starting the third cycle of its review in disclosure in the third quarter of 2014. If, at that point, firms are not complying with the rules on disclosure, the FCA has said it will consider further regulatory action, including referrals to enforcement.
However, it is likely two firms with egregious failings uncovered in the second cycle of the review will be referred to the FCA’s Enforcement and Financial Crime Division. This includes one financial advisory firm and one wealth management firm.
A number of tools have been made available to firms, including examples of good and poor practice and a factsheet, both published in 2013. To further help firms, the FCA has produced a new video that provides an overview of the key disclosure requirements.
As part of its review into disclosure, the FCA looked into how advisory firms describing themselves as independent were using the label. The results were published separately in March. The review found that most firms appeared to be using the independent label accurately.
Notes for editors
- Thematic review, Supervising retail investment advice: RDR disclosure and video: Delivering RDR disclosure.
- Thematic review, Supervising retail investment advice: how firms are implementing the RDR (July 2013).
- FCA factsheet 007: Disclosing your firm’s charges and services (July 2013).
- Thematic review, supervising retail investment advice: Delivering independent advice and video: Delivering independent advice. (March 2014).
- Finalised Guidance: 12/15 – Retail Distribution Review: independent and restricted advice (June 2012).
- On 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.