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Compliance – Disclosure issues in DB transfer advice

6 January 2019

One of the FCA’s primary areas of focus continues to be DB Transfer advice and in December 2018, the FCA published its latest findings on the poor quality of much of the transfer advice provided to clients [read it here.]

What most readers could well have missed was the fleeting mention of disclosure issues that were also found in the transfer cases reviewed. The FCA found:

• only 29.2% of firms’ disclosure was compliant;

• 9.1% was unclear;

• a whopping 61.7% was non-compliant!

The disclosure failings were driven in part by failings in firms’ standard documentation, particularly in the way firms present initial and ongoing fees.

Even allowing for the fact that these findings arose from a targeted selection of firms, the results are entirely consistent with what we often find when we review firms’ disclosure processes and documentation.

Some six years after RDR changed how firms must charge for advice and how services and costs must be disclosed, we still regularly find firms with fee structures and disclosure documentation that are not compliant.

Common fee issues

  • vaguely defined structure – usually identified by the use of phrases such as “up to” or “typically”;
  • boundary issues – usually associated with percentage fee basis, where a client investing, say, £200,001 would be charged less than a client investing £200,000;
  • mystery fees – some firms state that they charge more for ‘complex’ cases without defining what that means or what they would charge;
  • ongoing fees that are differentiated for different service levels when, in reality, those service levels are essentially the same;
  • firms not charging the fee that is stated in the published fee scale – any deviation from the published scale should be exceptional, declared to the client, logged centrally and for good documented reasons – not simply to ‘secure the business’ or because ‘the client asked for a discount’. (If fees are often charged differently, it is likely that the fee scale is wrong and needs to be reviewed.)

Common disclosure issues

  • client agreement is not actually an agreement, merely a terms of business;
  • document that requires client signature does not actually state the service and costs or refer to a document that does;
  • disclosure not issued on time – it should be at the earliest opportunity;
  • even where issued on time, some firms do not have a means by which they can prove when it was issued;
  • the description of the firm’s independent status has not been updated to reflect the new MiFID II definition;
  • documentation not updated for IDD;
  • GDPR / Data Protection 2018 not dealt with correctly.

Our View

Whatever the charge, it must be clear to the consumer. You must disclose your charging structure to a client upfront and in writing, so they have the information in good time before the advice process starts. You must also agree and disclose the total charges your client will pay as soon as you know this.

You can only take an ongoing charge if you are providing an ongoing service – for example regularly reviewing the performance of a client’s investments – or for regular payment products.

If there is an ongoing charge for an ongoing service, you must confirm the details of the service, its charges and how your client can cancel the service.

Firms should review their fees and disclosure against the following tests. If the answer to any question is ‘No’ then your fees/disclosure may not be compliant.

  • Do you disclose your initial and ongoing charges in cash terms?
  • If your charge is a percentage, do you provide cash examples?
  • If you charge an hourly rate do you provide indicative examples?
  • Do your clients receive your charging structure before you provide any advice services?
  • Where your initial charge for regular premium business is paid in instalments, have you made sure they are not open-ended but end when the initial charge is paid off?
  • Do you disclose the total adviser charge specific to the client as early as practical (for example, at the end of the first meeting or shortly afterwards)?
  • Do you disclose it before the client incurs any charges?
  • Is it in cash terms?
  • Is it in writing and in a durable medium?
  • Do you record the client’s agreement to the specific amount to be charged?
  • Do you ensure the client has agreed to the method to be used to pay the charge? For example, if you normally use facilitation, is this agreed with the client?

Suggested action for adviser firms is to review their fee scale – does it pass the tests above? And also, to review their disclosure documentation, does it reflect the MiFID II independence definition and changes required by GDPR and IDD?

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