Financial Conduct Authority  

Getting clear about disclosure

Getting clear about disclosure

The FCA recently conducted a suitability review of 656 IFAs and intermediary firms. The good news is that overall it found firms were indeed largely providing suitable advice. There were some variations with restricted firms and network members generally doing better than independent directly authorised firms.

It did, however, express general disappointment at the levels of disclosure being provided – with 69 per cent of network members offering acceptable levels while, again, the directly authorised firms performed worse – with only 46 per cent meeting expected standards. 

Size apparently matters when it comes to disclosure. Firms with two or fewer advisers scored a poor 42.2 per cent on acceptable disclosure measures while 63.9 per cent of firms with 25 advisers scored a more respectable – if not wholly satisfactory – 63.9 per cent. Mid-size firms performed the worst, at 41.8 per cent.

What does this mean to the industry, the regulator and to the army of analysts, commentators and consultants whose existence depends on such things? How did we get here in the first place? And what lessons can the industry learn?

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The FCA was broadly "encouraged" by the results concerning the suitability of advice, finding many firms "going beyond" compliance. Should this be a surprise? In the heavily regulated market in which firms operate, rogue firms giving poor or unsuitable advice have long ago perished. Only the strong have survived – and that is a good thing you could say.

Being nit-picky, the FCA did highlight some issues with replacement business – with firms encouraging new investment that cost more than it delivered (in the short term at least one presumes) and that required clients – perhaps unwisely – to give up valuable guarantees without obvious gains. There were also some issues regarding too heavy reliance on risk profiling tools. Both of these, though, are somewhat subjective and I would question whether – given the scope of the review – the FCA was always in a position to question the details of advice or to really understand the risk appetites of clients or their investment needs through such broad analysis of random pieces of advice. 

For the record, the FCA pulled 1,142 individual pieces of advice focused on pensions and investment personal recommendations delivered by firms to retail customers in 2015. Each file review focused on a specific personal recommendation. The year 2015 was chosen deliberately, to coincide with the changing landscape of the pensions reforms at the time. The focus was on the process of advice and its suitability rather than the outcomes of the investment and whether it proved to meet the client's objective. So, despite this and definitely not because of it, the overall results on suitability were pleasing.

Disclosure appeared to be quite another matter. The FCA found firms were broadly meeting rules on conduct disclosure and the information required for suitability reports, although some reports were too long or too complex. The key problems were with the disclosure of charging structures – in that these were often unclear, lacking fixed estimates of costs and IFA time. The FCA stated: "These are persistent issues, previously highlighted during the three stage RDR thematic review in 2014. We are disappointed that this continues to be an issue."

When the FCA is "disappointed", we should all start to worry. The resulting approach for now though is a relatively conciliatory one, where the focus will be on stepping up the FCA’s communication with smaller independent firms.