The Financial Conduct Authority (FCA) assessed 1,142 individual pieces of advice provided by 656 firms as part of its review (21-page / 325KB PDF), which began in April 2016. The advice was assessed against the suitability and disclosure rules in the Conduct of Business sourcebook (COBS). Suitability of advice was one of seven priorities identified by the regulator in its business plan for 2016/17.
The FCA found that the advice provided was suitable in 93.1% of the cases covered by its sample. The advice was unsuitable in only 4.3% of the cases, and unclear in only 2.5% of the cases. Restricted firms ranked slightly better than independent firms on suitability, with advice suitable in 97% of the cases compared to in 90.8% of the cases involving independent advisers.
However, the regulator said that it was "disappointed" that disclosure continued to be an issue for firms. It found "acceptable" disclosure in only 52.9% of the cases in the sample, along with 41.7% of "unacceptable" cases and 5.4% of cases where disclosure was "unclear".
Most of the issues with disclosure identified by the regulator involved "firms' initial disclosure", including on costs and services. These issues were "overwhelmingly" to do with "firms disclosing charging structures with wide ranges"; and "firms using hourly charging rates failing to provide an indication of the number of hours for the provision of each service, rather than firms failing to provide any cost information", the FCA said in its report.
"These are persistent issues, previously highlighted during the three stage Retail Distribution Review thematic review completed in 2014," the FCA said in its report.
"We are disappointed that this continues to be an issue. We consider that disclosure has an important role to play in supporting customers to make informed decisions about their financial affairs. Firms must ensure that their disclosure documents accurately reflect the services they provide and the associated costs," it said.
The FCA did not include any examples of good or poor practice in its report. However, it intends to share more detail and examples as part of a series of communications with advisers in the coming months.
Firms should also be aware of the "important changes" to advice and disclosure requirements due to be introduced through the recast Markets in Financial Instruments Directive (MiFID II), the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) and the Insurance Distribution Directive (IDD), the FCA said. MiFID II is due to come into force on 3 January 2018, while PRIPPs and the IDD are already in force.
The FCA intends to repeat the review in 2019, based on advice delivered in 2018. This will enable it to assess whether firms have taken the report on board, as well as how effective they have been when implementing the new requirements, it said.
Pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, said that clarity and ease of understanding was a vital feature of financial advice, particularly in relation to retirement and long-term savings products.
"It's good news for customers that the FCA found the vast majority of advice to be suitable," he said. "But to encourage more people to plan for their future, and to take advice, we need to make this as easy as possible."
"Key to this is ensuring that advice is easy to understand. Some may be tempted to give lengthy advice in the belief that this helps customers, when it may just cause confusion. Examples of good practice will help keep firms on the right track. If this encourages more people to take advice, everyone will benefit," he said.