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. Last year's survey shows that many firms haven't delivered these assessments and also haven't refunded the fees they've been paid.
To add to the problem, there’s also the potential for unrealistic customer expectations due to poor communication around the charging and service structure. Many consumers won't be clear what service they're due to receive, what a suitability assessment looks like, what it’s for, or whether they’ve received it. This has opened a broader conversation about what other services customers are paying for but not receiving.
The FCA isn't taking the issue lightly. As such, the financial planning sector could be looking at a large-scale redress and remediation exercise. This comes at a time when lenders face comparable scrutiny over motor finance commission, reflecting ongoing issues that arose before the Consumer Duty came into force.
The FCA's Conduct of Business Sourcebook outlines regulatory requirements for ongoing advice, including the need to complete an annual review and recommend whether existing investments remain suitable or if these investments should be changed.
The Consumer Duty has added to these requirements. Now advisers must 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.
Firms thinking about historic non-compliance often face a significant challenge with data. Any industry-wide back-book exercise will likely stretch back to 2018, and 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 a number of unanswered questions, around the potential redress itself. For example, it isn't immediately clear what standard of evidence is needed to document the provision of a suitable ongoing advice service. It's also unclear what failure threshold would trigger a full back-book review, or (where ongoing advice hasn't been provided) what proportion of the overall fee would be attributed to that part of the service and require repayment.
Some of these questions may be broadly addressed in the FCA’s upcoming market-wide feedback on ongoing advice, as well as in its External Redress Guidance (both due in Q1 2025). But firms will need to refine any remediation exercises as the FCA provides further direction.
While all financial planners need to hold minimum levels of professional indemnity insurance cover, as dictated by the regulator, almost all of the standard policies don't cover repayment of fees for non-delivery of a contracted service. This means that any large-scale refunds will create significant exposures across the sector.
Consequently, large-scale redress could make many financial advice firms unviable or unprofitable on a standalone basis, driving significant M&A activity across the sector. If many firms exit the market entirely this would be bad news for consumers, reducing competition and broadening the, already sizeable, 'advice gap'.
Firms that have charged for a service they haven't delivered will need to address the back book. However, it’s also essential to make sure that all forward-looking processes and services meet both the COBS requirement and Consumer Duty obligations.
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 the 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, with definitive records proving that they've taken place.
In response to ongoing regulatory focus, we're seeing firms make a range of changes across the sector, including:
clearer pricing and service differentials to identify clients for whom ongoing advice is likely to be a useful service
ensuring 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
There isn’t an industry consensus on how the go-forward process should operate, and understanding the pros and cons of different approaches is vital. In the meantime, it’s important to stay up to date with all regulatory announcements and guidance, and actively participate in industry forums to gauge and adopt good practice.
For further information, contact Jonathan Charles or Paul Cook.
