Disclosure is dead, long live disclosure!

Search for the word ‘disclosure’ in COBS and you will find 217 entries. These entries relate almost entirely to the requirements for the factual presentation of information, for example in costs and services documents, terms of business, etc. All these requirements still exist.

However, in recent months, we have seen the first signs of a change of emphasis by the FCA, as evidenced by the feedback to firms that have provided pension transfer advice. The FCA looked at several aspects for each transfer case checked, including disclosure, where the term was used to describe the quantity/quality of information provided to clients to help them reach an informed decision.

Confirmation comes from the August edition of the FCA’s Regulation round-up, which refers to the need to ‘facilitate consumer understanding’ and states:

“Throughout the coronavirus crisis consumers have been expected to make difficult financial decisions, many of which carry longer term consequences. We have been monitoring and evaluating the disclosure of firms, to understand if they are providing consumers with enough support with their decisions.” 

We believe that this could represent more than just a moving of label goalposts. The FCA is definitely increasing its focus on what clients understand when they make financial decisions.

This has long been in the rules. For example, COBS 9 contains a number of references to ‘client understanding’ and, in particular, the general requirement to assess a client’s level of knowledge and experience is explicitly related to ensuring that a client will understand the information provided in relation to a recommendation and the risks involved. 

Further support for this conclusion comes from the changes that are being made to rules around transfer advice. COBS 19.1.1.C currently states that firms must: 

“… take reasonable steps to ensure that the retail client understands how the key outcomes from the appropriate pension transfer analysis and the transfer value comparator contribute towards the personal recommendation …”

From 1 October 2020, this rule is amended to a much more robust requirement that firms must: 

“… get evidence that the client can demonstrate they understand the risks to them of proceeding with a pension transfer or conversion before finalising the recommendation, and keep a record of this evidence …”.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

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Our View

Despite appearing to be of little import, we believe that this could in fact be a sea change of focus hidden in a subtle change of terminology.

The use of “get evidence”, “can demonstrate” and “understand” in the new rule above is a clear pointer. Although this rule is pension transfer specific, it has relevance to all advice scenarios.

The implication is that there is more of an obligation on the adviser to prove client understanding. To our minds, this has always been a core requirement, albeit not one that is generally done well. Such proof should be demonstrable on the client file e.g. file notes that test client understanding, and most certainly in suitability reports, which need to do more than reiterate the client’s situation at the start, provide a recommended solution with justifiable reasons at the end, with technical information sandwiched in between. Clients will have assumed that advisers know their stuff, so there is no need to prove that! What they need however is for advisers to demonstrate an ability to explain the key aspects of the recommendation, including the risks involved, in a way they can truly understand.

That means the recommendation should be presented in plain English, taking account of the client’s level of knowledge and experience. It is self-evident that a client with no investment experience who has just inherited a large sum of money warrants a different presentation of advice in contrast to a client who is an investment professional.

And, for an explanation to be understood it must be there in the first place. We regularly see cases where a key point is stated but its implications for the specific client are not explained. A good example is in transfer cases where the Transfer Value Comparator is stated, using the colourful bar chart from the TVC report. Stating the TVC is £X is not good enough. Clients need to understand what that means for them.

A wise man once said that the best advice is the advice the client understands, and the best outcome is the one that the client expects. It seems clear that this common sense adage is now being taken to heart by the FCA and firms would be well advised to do the same.

Action Required By You

  • Remember that clients generally have not taken the financial exams that you have, so a straightforward explanation of the recommendation is likely to be of benefit;
  • Record evidence (e.g. file notes) of you testing the client’s understanding, for example, knowledge and experience, attitude to risk and capacity for loss;
  • Review your suitability reports objectively – do they actually explain key aspects of the recommendation and, if they do, is the explanation likely to be readily understood by the client?
  • ATEB Suitability is intelligent suitability report writing software. You will find more information and can sign up for a free trial here;
  • Contact your usual ATEB Consultant for assistance with creating a robust advice process or contact ATEB directly.

About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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