MSE News: Financial advice firms warned they face fines or bans

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"The FCA has found three quarters of financial advice firms are failing to keep clients properly informed about charges"
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Financial advice firms warned they face fines or bans

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  • dunstonh
    dunstonh Posts: 116,635 Forumite
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    edited 8 April 2014 at 11:49AM
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    What the MSE article fails to mention was that just 113 firms were checked. The firms in the sample ranged from small financial advisers to networks and large national advisers, and banks. They also included a selection of wealth managers and private banks as well as firms where the provision of investment advice was not their main business (e.g. solicitors, accountants and general insurance brokers). The worst offenders were private banks and wealth managers (who performed poorer than other firms in nearly all aspects). Both of these are very different to the financial advice firms that most consumers use. Sadly it did not break down the classifications of financial firm type. Although the very small sample size and the range of businesses covered would really make any conclusion of wider trends impossible.

    However, some breakdown on the failures were given.

    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 ongoing charges may fluctuate.


    It appears that the FCA is mainly concerned about percentages having a monetary amount given with them. It is not enough to say the charge is 0.5% p.a. of the value. You have to go further and give an example "e.g. if your investment was worth £100,00 then 0.5% of that would be £500 over a year". A trend in responses to this from financial firms is that the guidance has been wishy washy and open to too much interpretation and that the firms would like to know what the FCA would actually want to be displayed.

    It should be noted that only 2 out of 113 firms (1.77% of firms) is being referred for regulatory action. The others just need to make tweaks to their documents or processes. This was after all a review to give more guidance on good practice and poor practice. So, the headline could have read very differently.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • SnowMan
    SnowMan Posts: 3,365 Forumite
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    edited 8 April 2014 at 12:22PM
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    The FCA press release is at

    http://www.fca.org.uk/news/fca-review-shows-too-many-advisory-firms-are-not-yet-clear-enough

    Firms were clearly told what was required of them in terms of disclosing charges, in the first of the three part assessment. I remember reading some of the FCA's examples of good practice at the time and it seemed very clear indeed what was being asked of firms.

    It seems that despite that clear guidance firms are still not disclosing charges as they should, and this has what has come out in the second part. 73% is quite shocking.

    The RDR has been a brilliant thing for investors through the transparency it has provided. The FCA are right to ensure this transparency of charging is not scuppered by former commission based advisers trying to recreate the old system under a mis-application of the new rules.

    Hopefully there will be be better news in the third part when it comes out.

    (Note I do not work in the financial services industry and I am not paid to post on this forum)
    I came, I saw, I melted
  • dunstonh
    dunstonh Posts: 116,635 Forumite
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    edited 8 April 2014 at 12:41PM
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    Firms were clearly told what was required of them in terms of disclosing charges, in the first of the three part assessment. I remember reading some of the FCA's examples of good practice at the time and it seemed very clear indeed what was being asked of firms.

    Traditional advisory firms did have good guidance given previously. Our initial disclosure documents changed, like most other IFAs I know based on that feedback. There is little excuse for core advisory firms not to comply with most of the things raised. However, the more recent focus has been on non traditional/standard advisory firms and recent feedback from the regulator has looked at them more closely. i.e. solicitors, accountants, general insurance brokers, private banks. I have seen our compliance company chuck out a lot more compliance updates and changes for those types of companies in the last few months but prior to that you saw very little. However, there has been very little affecting IFAs/FA firms. Even by pre-RDR standards. The consumer credit licence being the main thing and the MMR (mortgages).

    As I said, it would have been nice to see a breakdown of where the failures were to see what parts of the industry have embraced RDR and which have not. I suspect that firms where it is not their core business but have found themselves party to RDR have not embraced it as much as firms where it is their core business. However, a sample of 113 firms across multiple distribution channels is far too small to indicate anything. Some channels may only have had 1 or 2 representing that business style and plain luck would decide if that channel would be viewed as good or bad.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • Aegis
    Aegis Posts: 5,688 Forumite
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    I (probably understandably) have a few issues with this review, and I'll try to go into some of those issues below:
    FCA wrote:
    58% of firms failed to meet the requirements for disclosing their generic charging structure. The key issues for the firms surveyed were:
    • Firms using a percentage-based charging structure did not provide examples in cash terms within their initial disclosure document (24% failed to disclose their initial fees and 30% failed to disclose their ongoing fees).
    • 73% of firms that used an hourly rate did not provide an approximate indication of the number of hours that the provision of each service was likely to require.
    • 62% of firms that used an indicative hourly rate did not provide the basis on which it may vary.
    • 45% of firms that offered more than one option of calculating the fee within their charging structure did not made it clear what basis would be applied and when.

    It's worth bearing in mind that this is a generic document introducing the firm. I can't fathom how this level of specific detail is supposed to be possible unless the old model of 3% plus 0.5% is used for everything. Almost all clients I see are different in terms of up front and ongoing requirements, so a simple indicative fee in pounds and pence is impossible without actually speaking to them and providing a bespoke quote. The FCA would apparently have us set out exactly how much "an investment" or "a pension transfer" would cost when in reality these fees will vary significantly depending on the level of complexity.


    Additionally, this fails to take into account firms with bespoke charging structures. When I see a client, I offer project costs, hourly fees or percentage fees, sometimes a combination of two or all of the above. Again, how is a generic document going to account for this unless we decide to apply blanket charges to everyone regardless of individual requirements (which no other profession is required to do)?

    50% of firms failed to meet the requirements for disclosing the client-specific costs. The key issues for the firms surveyed were:

    • Firms using a percentage-based charging structure did not disclose the fee in cash terms within their client-specific disclosure document (24% failed to disclose this in relation to initial fees whilst 41% failed to make the proper disclosure in relation to ongoing fees).
    • 22% of firms surveyed did not appear to provide the client-specific disclosure as soon as practicable.
    • 8% of firms surveyed did not disclose the client-specific charge in a durable medium. However, this failing was mainly concentrated within the Wealth Management and Private Banks’ category, as 36% of these firms failed to provide any client-specific adviser charging disclosure.


    I deal with accountants and solicitors on a regular basis, and I always have to apologise for treating them like idiots with the charges. For example, if they choose a 1% implementation fee it is considered a failing in this report (and by my compliance department, hence this rant) not to state that 1% of £100,000 is £1,000. This requirement should simply be to set out the charges in a way that can readily be understood by the client and to offer further explanation if required.


    "Did not appear" and "As soon as practicable" are very wishy-washy phrases to use when carrying out an important review like this. I would genuinely like to know what this requirement was, as it appears to mean that the reviewer simply didn't like the fact that the adviser didn't get back to him as soon as he would have liked.



    The final point is a fair point, as charges should be available for review by the client at any time rather than, say, on a website which can be changed without warning.

    ‘Other’ charging issues
    58% of firms failed to meet other important requirements in relation to the disclosure of their charges. The key issues for the firms surveyed were:

    • 40% of firms using a percentage-based charging structure for their ongoing service failed to disclose that the fee would increase as the fund grows.
    • 16% of firms surveyed did not make it clear when the client would start to incur charges.


    I would again have thought that the first issue was obvious to the point where it wouldn't need to be stated. Without checking my own work, I can't say for certain if I actually point out that the value-based charges will increase as the fund grows rather than simply implying this with phrases like "at the current value". Mea culpa if not, clearly I need to pretend that my clients are stupid.


    I'd have thought that the second point should under most circumstances also be obvious, but I do try to point out when charges are applicable to my clients as I tend to invoice rather than collect product-based fees.

    Disclosure of restricted status


    Not touching this one as I'm not restricted.

    Disclosure of ongoing services
    34% of firms failed to meet the requirements for disclosing their ongoing service. The key issues for the firms surveyed were:

    • 20% of firms’ documents failed to clearly disclose what service a client would receive in return for the ongoing fee.
    • 18% of firms’ documents failed to disclose that the client could cancel the ongoing service, or how they would go about doing so.
    • 11% of firms surveyed did not appear to have a robust procedure for ensuring that they deliver the ongoing service that they have agreed with their clients.


    The first point is a fair criticism, as clients should be aware of what they are paying for.


    The second one is getting rather absurd. My compliance department has mandated that in order to comply with this, I have to state in every report which mentioned fees that a client can cancel my service whenever they like. It's getting to the point where it actually reads like I'm trying to get rid of clients, which is rather frustrating.


    Third point is again valid, though often impossible if the clients themselves are difficult to reach or don't want to come in for a review.
    I am a Chartered Financial Planner
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
  • zagfles
    zagfles Posts: 20,363 Forumite
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    dunstonh wrote: »
    It appears that the FCA is mainly concerned about percentages having a monetary amount given with them. It is not enough to say the charge is 0.5% p.a. of the value. You have to go further and give an example "e.g. if your investment was worth £100,00 then 0.5% of that would be £500 over a year".
    Sounds fair enough. Not everyone understands percentages, especially those who need financial advisors, 0.5% might sound tiny whereas £500 might sound big.
    It should be noted that only 2 out of 113 firms (1.77% of firms) is being referred for regulatory action. The others just need to make tweaks to their documents or processes. This was after all a review to give more guidance on good practice and poor practice. So, the headline could have read very differently.
    It could, had it been written by someone with a vested interest or an apologist for the industry.
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