Regulation  

FCA takes the softly-softly approach

For those of us who spend our lives struggling to understand what is happening in the murky old world of financial advice, July has seen the publication of two noteworthy papers: The FCA’s thematic review of adviser implementation of RDR (TR 13/5) and a study by Cass Business School with BNY Mellon.

Advisers will find the former easier reading than the latter, which challenges estimates of future revenues for the sector. In the short term this should concern adviser firms, many of which have propositions dependent on attracting a considerable number of well-healed clients to their proposition at not inconsiderable fees.

The thematic review is a helpful paper. The regulator could have made threatening noises and stormed into adviser offices with all guns blazing. It could have decimated adviser numbers, as relatively few will be fully RDR compliant. It has not. It has produced a report that comments on good practice and areas for improvement. Moreover it has said that it will repeat the exercise in October, on a wider sample. This seems to say that unless an adviser firm is extremely unlucky, nobody from Canary Wharf will come a-knocking on their door to close them down. It does rightly warn that if a firm is found to be failing to apply the rules, action could follow.

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Predictably adviser charging is the main event. The regulator is concerned about disclosure, and rightly so. Anecdotal evidence suggests that significant numbers of advisers are not disclosing fully, especially on further business from existing clients, and that providers are falling short too. This is certainly our own experience. Malcolm Kerr, director of Ernst & Young, said: “Providers do not appear to have adopted a consistent response to the requirement to ‘obtain and validate’ the client’s instruction to facilitate the payment of the adviser’s fee. Some require a written instruction from the client with the sterling amount and/or a percentage. Others are prepared to accept an assurance from the adviser that the client’s agreement has been obtained.

“As far as disclosure to the client is concerned I have no doubt that the vast majority of advisers are making the position clear to clients but a number are not. A number have said to me: I explain to the client that the regulator insists I charge a fee but they only have to pay if they go ahead with my recommendation and that we can arrange for the company (or platform) to facilitate it. Just like commission actually.”

This is more or less in line with our own experience. There are undoubtedly advisers who are not clear on the actual requirements.

This appears to be the case on cash disclosure, which is mandatory. Likewise there seems to be a lack of appreciation of the need to outline exactly what is being done for the fee. The review also reminds advisers that clients must be able opt out of ongoing services.

We believe that there is also an issue on clarity of disclosure. The nature of regulation and the complexity of retail investment makes it all too easy for details of adviser charging, unwittingly or not, to get lost in the mass of correspondence sent to clients.