RegulationJun 18 2015

FCA’s magnum opus yields results

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FCA’s magnum opus yields results

In January 2013, the FCA began a three-cycle thematic review of how firms were implementing the processes needed to meet the requirements of the RDR. The large scale of the review meant it took until Q3 of 2014 for all three cycles to complete, after which the regulator began work on its findings and analysis.

The FCA’s approach to the review changed throughout the cycles, moving from being gently supportive towards the firms that were struggling to meet the new regulation, through to deep disappointment, with promises of ‘disciplinary action’ for those that were still not meeting their requirements.

Although the findings of the reviews did become more positive as the cycles progressed, there were some issues that remained of concern to the regulator throughout, including disclosure, ongoing services and clarity to the nature of a firm’s restriction where the firm is providing restricted advice.

As you may gather from the scale of the review, the FCA is keen to ensure that RDR is having a positive effect on the industry as a whole. The regulator clearly remains committed to supporting the financial advice sector throughout this continuing period of transition, and over the course of the three cycles of the thematic review they have provided adviser firms with a broad range of information to help implement the RDR requirements and strengthen communication with customers.

In December 2014, the FCA published TR14/21: Retail investment advice: Adviser charging and services, which gives an insight into what a consumer believe to be important in an ongoing service arrangement. Hidden among the footnotes is a reference to a consumer survey the FCA undertook between September and October 2014, the results of which showed the services that clients most valued from their adviser:

• Unrestricted access to their adviser

• Prompt responses to any queries

• Being proactive with communications

• Personal impact of any legislative changes

• And, above all, face-to-face reviews

The FCA commissioned research to be done into more than one thousand advice users since the implementation of RDR. It was carried out by NMG Consulting, an independent research company appointed by the regulator. While any assessment can identify improvements, the results from these findings produced some incredible evidence of the increasing professionalism and improvements in the way firms were disclosing and delivering their services.

The findings from this research highlighted to the FCA that two out of every three of the advice users were in receipt of an ongoing service. This demonstrated real commitment from clients to work with their adviser to ensure their investments continued to meet their financial objectives and desired outcomes. Most incredibly, but perhaps not surprisingly, is that nearly every single individual in receipt of this ongoing service stated they were satisfied or very satisfied with the level of service they received. This also confirmed that where people attach such value to a service they are more than willing to pay for it. It is important for the regulator to highlight these findings and ensure the standards are replicated, therefore the following guidance was published to all firms to help them achieve the highest level of professional standards;

• The adviser must deliver services as agreed: clearly the FCA will be primarily looking at this from a consumer point of view; in other words, making sure that the client knows specifically what services they should be receiving, meaning they have a clear and measurable outline of what their relationship with the firm will deliver.

• Be clear in cash terms of the cost of the service; this has been highlighted by the regulator during each review cycle and is therefore a consistent failing that has two distinct strands.

Firstly, any communication issued or conversation carried out has to establish all costs in a clear and meaningful way. This means quoting cash examples where percentage based charges are applied.

Secondly, where ongoing services are agreed it is important to make the client aware that the cost of the service can fluctuate in line with the investment funds. It is also good practice to remind your client of the cost of the ongoing service at periodic intervals.

• Tangible and interactive; the FCA is keen to make sure that the ongoing services a client receives are quantifiable and measurable. As a very general outline, avoid using any phrases that could be subjective; “I’ll be in touch if anything changes” and “Give me a call if you need something”, for example, could mean completely different things to different clients. I would recommend you stick to absolutes: “If your funds under management deviate from the level we have agreed, I will send you a letter within two working days to let you know”, or “Someone from the office will call you a month before your policy expires to arrange an appointment”. With regard to interactivity, two-way channels of communication should be kept open and the client should always feel as though his adviser is accessible should he need anything.

• Management information (MI) to identify appropriateness of the services; when putting together an ongoing services outline for his firm, an adviser needs to be sure that he has service levels that work for his client bank, as well as his business model. Having a range of impressive service levels with all sorts of add-ons and technological wizardry might look good in theory, but are without value if none of the services are actually being used by clients. The FCA wants advisers to have reliable MI in place to be able to measure and monitor the services they have in relation to usage by clients in reality.

• Does the firm have adequate resources to deliver? Again, there is no point signing all clients up to an ongoing service contract that promises the world, if there are not enough resources at an advisory firm to deliver on it. This is a point that should be revisited often; a business plan that looks valid in theory could end up over-stretching advisers when applied in practice. I think we all know from experience – both as consumers and suppliers – that there is nothing more likely to leave a sour taste in the mouth than someone over-promising and under-delivering.

The majority of the advisers we work with already have the points above covered in their processes, and have done since long before the introduction of RDR. However, from a regulatory point of view, good practice needs to be demonstrated. In addition to fulfilling all the requirements above, you need to also record the fact that you have fulfilled them.

Richard Nuttall is head of compliance policy at SimplyBiz

Key points

In January 2013, the FCA began a three-cycle thematic review on how firms were implementing the processes needed to meet the requirements of the retail distribution review RDR.

Two out of every three of the advice users were in receipt of an ongoing service.

The FCA is keen to make sure that the ongoing services a client receives are quantifiable and measurable.