Article

Ongoing advice fees under scrutiny from the FCA

By:
Paul Cook
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The FCA has published findings from last year’s survey of the largest financial advice firms to understand the provision of ongoing services in the context of the new Consumer Duty rules. Jonathan Charles and Paul Cook look at the implications of the survey and next steps for firms.
Contents

In 2018, the FCA introduced new rules based on MIFID II, requiring that any firm charging for ongoing financial advice must provide their clients with an annual suitability assessment. The Consumer Duty has added to these requirements and advisers must also consider if an ongoing advice service is appropriate for each client (the target market assessment); and assess whether the service offers fair value, based on the fee charged. 

Despite concerns that many firms weren't delivering these assessments and refunding clients' fees where necessary, the FCA survey results are more positive than initially expected. They show that suitability reviews were delivered in 83% of cases. Of the remainder, 15% of clients either declined the review, or didn't respond to the offer of one. 

The survey results show no attempt to deliver the suitability review in less than 2% of cases. 

The case for redress 

Crucially, the FCA also set out its expectations for where it expects redress to be paid. In its accompanying press release, the FCA stated that its focus is on where firms “haven’t attempted to provide the services they offered, and customers are paying for. In those instances, they will need to put that right”. 

Where clients have actively declined a review, and a firm can evidence that interaction – the FCA has stated that firms won't need to pay redress. But if a client has declined over a number of years, then it’s important to consider if the service remains in their best interest. 

Where clients haven't responded to requests, and again, assuming a firm can evidence its reasonable attempts at communication – the FCA expects redress to be less likely. But where clients have persistently not engaged, firms should have already considered if the service remains in their best interest. 

Based on these statements, it's therefore reasonable to assume that redress is only likely to apply for a small proportion of a firm’s clients. However, it’s important to note that all firms will have significant work to do to demonstrate their historic compliance across the full review period. 

Meeting good practice 

The FCA is clear that while the vast majority of suitability reviews were delivered within the sample of firms it surveyed, there were differences in the quality of results between firms. It also highlights that the survey population wasn't a representative sample of the wider sector, and some firms weren't able to provide data for all years requested. 

As such, the FCA expects firms to review their current practices and assess if they have delivered all services that clients have paid for, going back to 2018. Where there are any failings, firms should consider proactively contacting their clients to assess if any harm was caused. If harm was caused, firms must take appropriate action. The FCA will also monitor complaints in this area, with further work later this year to assess firms’ responses. 

Many firms will struggle with weak systems and poor documentation, which could be more problematic the further back they go. Effective use of data analytics and AI tools will be vital to identify the affected cohorts. These tools can extract information across disparate systems, including both structured and unstructured data (such as emails), saving time and reducing cost. 

There are also some unanswered questions. For example, it isn't immediately clear what standard of evidence is needed to document a firm’s attempt to provide an appropriate ongoing advice service. It's also unclear how long it's reasonable to charge fees to a client while attempting, but ultimately failing, to provide a service.  

There's also no direct guidance on what failure threshold would trigger a full back-book review, or (where a firm hasn’t attempted to provide an ongoing service) what proportion of the overall fee would be attributed to that part of the service and require repayment.   

Impact on the wider market 

Notwithstanding the expected lower overall redress activity, there will still be some firms where large scale refunds of fees will be required. While all financial planners need to hold minimum levels of professional indemnity insurance cover, as dictated by the regulator, almost all the standard policies don't cover repayment of fees for non-delivery of a contracted service. This means that those firms will have significant exposure.       

As the scale of the problem in the wider sector is still unclear, given the sample size of the FCA’s survey, this could drive some M&A activity across the sector, or some firms could exit the market entirely. This would be bad news for consumers, reducing competition and broadening the, already sizeable, advice gap.     

Next steps 

While this is undoubtedly a good result for the industry, the option of doing nothing about the back book has been taken off the table. Every firm will need to demonstrate that it has assessed whether it has failed to provide (or attempted to provide) the expected service since 2018 – and take action if that has been the case. The FCA will be following up on what firms have done to make this assessment. 

However, it’s also essential to make sure that all forward-looking processes and services meet all regulatory requirements for ongoing advice, including COBS and Consumer Duty.  

As a critical first step, firms must ensure that they've completed a high-quality fair value assessment on the ongoing advice service. This will drive clarity over which clients should receive that service (and therefore those that shouldn't). It will also identify the critical, or valuable, parts of the service, which need to be delivered to a high standard. Firms will need definitive records to evidence that the service has either been delivered, or that the firm has taken reasonable steps to attempt to deliver it.     

To maintain compliance with rules on ongoing service charges, firms can consider the following changes: 

  • Clearer pricing and service differentials to identify clients for whom ongoing advice is likely to be a useful service

  • Ensure clarity within consumer information on the ongoing advice service and the associated charges, including prompts to allow the client to easily decline (or later cancel) that service

  • Better disclosure of ongoing costs and annual written acknowledgement from clients that they understand the service provided        

  • Hard thresholds governing when an ongoing service fee should be turned off if an annual review isn't delivered 

  • Review existing processes, controls and monitoring to assess how services are delivered in line with contractual obligations 

  • Appropriate systems to schedule and resource suitability reviews

Later this year, the FCA will review existing rules around ongoing adviser services and assess how firms have responded to the issues raised. In the meantime, it’s important to take proactive steps to maintain compliance and undertake any necessary remedial action. 

For further information, contact Jonathan Charles or Paul Cook