FCA issue damning verdict on disclosure of charges

The RDR introduced new disclosure requirements to improve transparency for consumers. These disclosure requirements play a crucial role in allowing firms to clearly communicate the nature and the cost of their services and providing clients with the information necessary to make informed decisions. 

The FCA RDR thematic review is a three stage process (see previous ATEB news). Stage 2 deals with independence (review findings already published) and disclosure (this review). The latest review is called ‘TR14/6 Supervising retail investment firms: being clear about adviser charges and service’ and can be found here.

The results from the second stage of the review show that a high proportion of firms are failing to give their clients the key information required under the RDR. The FCA found that a high proportion of firms are failing to correctly disclose to clients the cost of their advice, the type of service they offer (i.e. independent or restricted), and the nature of the ongoing service they provide. In particular, 73% of firms failed to provide the required generic information on how they charge for advice and/or failed to clearly confirm the specific cost of advice to their individual clients in a timely manner. For example, fewer than half (42%) of firms surveyed gave their clients clear upfront generic information on how much advice might cost and only half of the firms surveyed clearly explained how much advice would cost clients as individuals.

In the FCA’s view, the level of non-compliance identified and the failure of firms to meet their regulatory requirements is unacceptable. They are concerned that the extent of these failings may lead to poor outcomes for consumers.

The generic disclosure document (the charging structure) should help clients understand how much the advice is likely to cost them and the service they can expect to receive in return (e.g. whether the firm is providing an independent or a restricted service). Think of this like a menu in a restaurant – if you don’t like what you see, you can leave before ordering.

The client-specific disclosure document (the total adviser charge payable) should then provide clients with the cost of advice for their particular circumstances and the service that the firm has agreed to provide (including what they will provide in terms of an ongoing service, if applicable). This is similar to the restaurant bill, although in this instance it needs to be disclosed ‘as early as practicable’ so ideally be in the form of a fee agreement, or similar, agreed with the client prior to proceeding with the advice.

Here are the key deficiencies identified:

Initial Disclosure documents

  • Firms using a percentage-based charging structure did not provide examples in cash terms within their initial disclosure document;
  • Firms that used an hourly rate did not provide an approximate indication of the number of hours that the provision of each service was likely to require;
  • Firms that used an indicative hourly rate did not provide the basis on which it may vary;
  • Firms that offered more than one option of calculating the fee within their charging structure did not made it clear what basis would be applied and when.

Client specific disclosure

  • Firms using a percentage based charging structure did not disclose the fee in cash terms within their client specific disclosure document (both for initial fees and ongoing fees);
  • Firms did not appear to provide the client specific disclosure as soon as practicable;
  • Firms did not disclose the client specific charge in a durable medium.

Other charging issues

  • Firms using a percentage-based charging structure for their ongoing service failed to disclose that the fee would increase as the fund grows;
  • Firms did not make it clear when the client would start to incur charges.

Disclosure of restricted status

  • Restricted firms did not disclose, in a durable medium and/or in a timely manner, that they were restricted;
  • Restricted firms did not use the word ‘restricted’ in their disclosure;
  • Firms failed to clearly disclose the nature of the restriction;
  • Firms provided contradictory information on the nature of their restriction.

Disclosure of ongoing services

  • Firms’ documents failed to clearly disclose what service a client would receive in return for the ongoing fee;
  • Firms’ documents failed to disclose that the client could cancel the ongoing service, or how they would go about doing so;
  • Firms did not appear to have a robust procedure for ensuring that they deliver the ongoing service that they have agreed with their clients.


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.

ATEB Compliance offers compliance and regulatory advice.

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Our View

Firstly, we are impressed that the FCA has managed to introduce a word that we have never previously encountered – ‘egregious’ ; it was used to describe the standards in two firms and means ‘outstandingly bad, shocking’. Needless to say, both firms are likely to be referred to the FCA Enforcement and Financial Crime Division. 

This adjective does reflect the general tone of the review however and the FCA is clearly shocked with the findings.

It is not difficult to meet the disclosure requirements (wording and process) and we are confident that all firms who receive regular ATEB visits will meet the required standards.

Action Required By You

The FCA will be carrying out a third cycle of the thematic review to ensure firms have acted on our feedback. This is due to commence in the third quarter of 2014.

It is therefore essential that you audit your disclosure documentation and processes in light of the FCA findings and with reference to the FCA rules contained in COBS 6 here .

Please contact us here should you require specific assistance or guidance.

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About the Author

Steve is an ATEB Director and has a deep understanding of all matter regulatory, built up over his 30 years + in the industry. With a training background and a technical brain, he overseas numerous complex projects and client implementation work.

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