Today’s (7 April) disclosure paper delivered a scalding rebuke to the advice sector, warning that firms need to either shape up or face being shipped out. Here are a few points you may have missed.
1. Best practice isn’t always enforced...
It may seem at first like the FCA is asking for quite a bit when it comes to disclosing charges and disclosing whether or not you are restricted or independent, but the bare regulatory minimum that it enforces can leave room for manoeuvre.
Specifically, Rory Percival (pictured) made an odd admission to me regarding firms revealing they are restricted: a firm doesn’t have to drop the R-bomb until the actual client meeting.
This means that a given restricted advice firm does not have to use the word ‘restricted’ on its website or advertising material at all, as long as they don’t use the word ‘independent’. It would be best practice to do so, of course, but nobody is going to enforce that.
However, doesn’t this mean that the prospective client will have already committed to a certain extent?
Once the punter is in the physical door, sitting in a chair with a cup of tea in his hands and a stack of pamphlets before him, who is really going to get up and walk away when the smiling adviser explains that the mean old regulator makes them use this little word, but really they do serve the whole of the market for all but the most sophisticated clients?
Also, what client would possibly notice the simple lack of the word independent on an advisers’ website when they are shopping around?
For example, if a restricted firm can offer better rates as a result of deals with fund groups, they’ll sure as heck shout that from the rooftops. And when an average Joe Schmo investor is looking at where to put his money, will he really balk at the lack of the word ‘independence’ when the advice firm in question is boasting the best rates in town?
No, he’ll go to the meeting. And once he is in the office what possible detering effect could being ‘restricted’ possibly have?
2. ...but you should go the extra mile just to be safe
That being said, there were a couple of points in the disclosure notes that are worth highlighting and that advisers may not instinctively include in their client briefings where the FCA does expect you to go beyond the obvious basic level of compliance.
If you charge a percentage for example, you have to make it clear to the client that the fee will increase if the size of the fund increases.
If you charge an hourly rate, on the other hand, you have to provide not only an estimate of the number of hours the service will likely take, but what factors would likely lead to the process taking more time than predicted.
All in all, the FCA doesn’t just want to see absolute pound-and-pence figures, it also wants you to explain quite clearly what could cause those figures to change.
Also, make sure to give fee estimates in two stages: a first generic stage about your overall rates, followed by a second bespoke stage where you demonstrate how those rates would likely apply to an individual client, aiming all the while for as simple and absolute a figure as possible.
3. Two firms ticked a lot of the wrong boxes
Two firms will likely face enforcement action for their “egregious” failings. However, Mr Percival told me they did not stumble on any one test in particular. Rather, they were the two firms that amassed the greatest number of grievances.
The FCA bods were - understandably - cagey when it came to divulging any further details, but they did give us a couple of hints as to who the firms aren’t: for example, Mr Percival said they had not come across any firms which paid their advisers up front and recouped costs later in the form of an annual fee.
Last week, IFA Tim Horrocks told FTAdviser some firms “are are still able to effectively pay commission and have 100 per cent allocation where the rest of the industry have clients that pay fees”. He lamented it will be good when we are all working on a level playing field”.
The FCA did not see any such firms in its review and is not taking action against any. The potential enforcement here is purely and simply for not giving enough detail on charges - and being the worst of a bad bunch.
4. The industry just was not listening
Oh yes, it was indeed a bad bunch, and the FCA is losing patience.
Three quarters of firms failed to provide the correct generic information on charges. This is high number, especially considering the FCA came out with a warning in July saying companies had better get their acts together if they wanted to avoid the penalty box.
So how come firms did not change their ways between then and now? Clive Gordon said it was a lack of engagement and a failure to keep the clients’ best interest at the heart of their business models.
I tried to dig further, but to no avail. The FCA was not interested in explaining failings, it is simply baldly stating where advisers are coming up short.
“But Clive, why exactly did the firms lack engagement?” “Well Michael they failed to engage”. And so on.
So is it a matter of cost/benefit: is it worthwhile edging into the regulatory danger zone rather than coming clean with clients? Or is it that the firms just don’t take the FCA seriously enough?
Considering how much scrambling we saw in the run-up to the RDR, I wonder if it’s just a matter of procrastination.
I do have to wonder. Hypothetically, if round three comes around and firms still haven’t shaped up, what will the FCA do next?
Dishing out action against that many firms would be a big job.
5. Wealth managers and private bankers were the worst of the lot
Although the FCA did say that the failings it uncovered permeated through all layers of the financial services onion, it added that the rottenest smell came from wealth managers and private banks which “performed even more poorly in nearly all respects”.
Indeed, one of the two firms the regulator is likely to refer to enforcement is a wealth manager, which the FCA distinguishes from an adviser as being someone whose primary focus is discretionary investment management and who might provide other advisory services.
As a footnote the FCA said banks, building societies and insurers “had complied with the vast majority of the disclosure requirements”. However, the number of such companies who returned the FCA’s questionnaire was too small to be statistically relevant.
