In the first of three reports to be published as part of the regulator's thematic review into compliance with the Retail Distribution Review (RDR) regime, the FCA said that it had found examples of advisers describing themselves as 'independent' when in fact they were offering advice on a 'restricted' basis. Some firms were not being clear about the nature of the restrictions on the advice they offered, it added.
Under changes to the regulation of retail investment advice that came into effect at the end of last year, financial advisers are now required to inform clients whether or not the advice they offer is provided on an 'independent' or 'restricted' basis.
Under the RDR rules advisers are prohibited from referring to themselves as offering 'independent' advice unless the personal recommendations they make to clients on retail investment products are "based on a comprehensive and fair analysis of the relevant market" and are "unbiased and unrestricted". The RDR rules define a 'relevant market' as one which comprises "all retail investment products which are capable of meeting the investment needs and objectives of a retail client".
"So that clients can be clear what services they are getting, firms have to be upfront about whether they are independent or restricted before they give advice," the FCA said in its report. (14-page / 757KB PDF) "A firm must explain whether it is independent or restricted in good time before it provides services and include the term ‘independent advice’ or ‘restricted advice’ in its explanation of its services to its clients. It is important that a client is informed about the breadth of the service they will receive."
"Where a firm provides restricted advice, it must explain the nature of the restriction. We have not prescribed wording for firms to use when describing their restricted service, but firms should ensure that it is clear, fair and not misleading. We were concerned that a client would be unable to understand the nature of some firm’s restrictions from some of the explanations we saw," it said.
The FCA's thematic review was based on information provided by 50 advisory firms about how they "devise, disclose and deliver their services and charges". The firms were also asked to provide copies of their disclosure documentation, whilst the regulator conducted a more in-depth review with a number of the businesses after it had assessed all the information it had received.
The regulator said that it considered one advisory firm that directed 98% of its businesses to one platform provider not to be offering 'independent' financial advice. Another firm that operated a two-tiered advisory service was also considered to be offering 'restricted' advice, it said.
"We found examples of the situations where we considered firms may not be independent in practice were: almost all business being placed with one platform, and having a pre-determined list of products or investments," the FCA said.
Although financial advisory businesses had generally "acted to implement the new requirements" of the RDR, the FCA said it had identified some other areas of concern, including in relation to adviser charging.
Under the RDR rules advisers can only receive payment for the personal recommendations they make about investments from clients. They cannot be remunerated through commission payments offered by providers of financial products. The adviser charging regime was introduced after the FCA's predecessor, the Financial Services Authority, expressed concern that the payment of commission to advisers risked clients being issued with personalised recommendations that were not best suited to them.
In its report, the FCA said that some firms were not presenting information about charges in a sufficiently clear format. It said some of the companies were detailing the information as a percentage and not in "cash terms". In addition, it said some advisers were failing to provide clients with information about generic charges that would be applied to their services "in good time" prior to issuing them with personal recommendations and that some firms were also unclear about the nature of ongoing services they provide to clients.
"The client should understand how much they will end up paying as early as is reasonably possible," the FCA said. "The costs have to be in cash terms, or convert non-cash terms into cash examples. The documentation should also make clear to the clients at what stage of the advice process charges begin to accrue."
Financial services law expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said: "Old habits die hard. Setting an adviser charge tariff based around percentages of funds invested is not doing it in cash terms which is what the rules require and is simply trying to preserve the old commission system by another name."
"The FCA want to move to a more transparent charging regime involving, quite simply, pounds and pence. Also, if advisers think passing a few fund performance sheets to a customer justifies receiving an ongoing adviser charge in the New World, like they did when trail commission was being paid to them, then they are clearly mistaken. This is all about the FCA checking that advisers are very clear about the services they can provide and the charges that a customer will pay for that service," he added.
"This is a good warning from the regulator to advisers to review their charging and disclosure mechanisms to ensure they are on the right side of the rules now. The first six months have passed and there should be no expectation that there is more time to sort it out after this," Geiringer said.
Separate consumer research conducted on behalf of the FCA also highlighted areas of concern in relation to RDR compliance. A report detailing the outcome of the research (53-page / 610KB PDF) suggested that the "disclosure documents" that advisers issue to clients could be clearer about what services clients need, the nature of services being offered, and what charges clients will face for those services.
