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Most advice firms will have noted that the FCA issued a communication to 20 or so of the largest advice firms on 15 February regarding their provision of ongoing advice services, and according to some of the industry press, this has been received with varying degrees of enthusiasm.

Some commentators have seen the challenges posed by the regulator under its Consumer Duty remit as the potential death knell of their businesses or their tenure in the financial services industry, whereas others have barely batted an eyelid. It isn’t difficult to see things from both angles.

At one end of the spectrum are firms that have long recognised that when clients sign up for their ongoing review service they must deliver what they promised, after all, they’ve convinced their clients about the benefits of the service and clients have agreed to pay for it. They agree to an ongoing charge for this service which they disclose the costs of within their (at least annual) ongoing suitability assessments. No big deal there then.

At the other end there are firms who receive ongoing remuneration from the vast majority of their clients, but for numerous reasons, fail to deliver the service they promised. They can provide a myriad of explanations for why reviews weren’t conducted or conducted on time (perhaps because the client didn’t need one in the first place). In some cases, the only service provided appears to be a valuation and a cover letter. Which is not a review, or sufficient.

We’ve covered this numerous times previously and did so recently in our article entitled Reviews. What do yours look like? – ATEB News (ateb-group.co.uk) but this is not necessarily the full nine yards.

Why not?

The trouble in many firms is that virtually every client has signed up for the ongoing review service, fundamentally because the firm saw the benefits of generating a sustainable ongoing remuneration stream, which in many cases required very little from the firm in return for it, so the ongoing review service has effectively become a default proposition.

And the problem is…

Well, under the principles of TCF and now, Consumer Duty, as well as a fundamental requirement to deliver what’s promised, not only does the firm have a moral and contractual obligation to deliver reviews, but it’s now also a regulatory requirement. According to some respondents to articles in the industry press, this seems to be unfair. Nasty old FCA.

In the context of the FCA’s communication on 15 February, they pointedly refer to: the number of clients due for a review of the ongoing suitability of the advice as part of the service, how many received that review, and how many paid for ongoing advice but whose fee was refunded as the suitability review did not happen.

Note that this refers to ongoing suitability.

As we’re aware, any assessment of suitability requires the issuance of a suitability report. COBS 9A.2.1 covers the requirements of assessing suitability (as does COBS 9.2), but COBS 9A.3.2 confirms that this must be accompanied by a report, and COBS 9A.3.3 bolsters this with:

When providing investment advice, investment firms shall provide a report to the retail client that includes an outline of the advice given and how the recommendation provided is suitable for the retail client, including how it meets the client’s objectives and personal circumstances with reference to the investment term required, client’s knowledge and experience and client’s attitude to risk and capacity for loss.

Investment firms shall draw clients’ attention to and shall include in the suitability report information on whether the recommended services or instruments are likely to require the retail client to seek a periodic review of their arrangements.

With some good news for ongoing suitability with…

Where an investment firm provides a service that involves periodic suitability assessments and reports, the subsequent reports after the initial service is established may only cover changes in the services or instruments involved and/or the circumstances of the client and may not need to repeat all the details of the first report.

This all became much more formal with the implementation of MiFID II on 3 January 2018. Some firms possibly felt that Brexit would have seen this softened to a degree, or even overturned altogether, but this hasn’t proven to be the case and the rules just formalised the requirement for firms to do what they’d agreed (in writing) to do and six years later the FCA is taking steps to ensure that where a client pays for an ongoing review service, they receive the service they were promised. Note to product providers and platforms here – about time they did something about your service standards too. Advice firms are faced with costs they really shouldn’t have to bear as a result, but they can’t justify passing these on to clients, can they?

But there’s more…

The keen-eyed will have spotted that the FCA’s request also asked for how many paid for ongoing advice but whose fee was refunded as the suitability review did not happen.

When we challenge firms on why they didn’t conduct reviews, or complete them on time, the list of excuses is apparently inexhaustible, yet they still feel that for some reason they’re entitled to retain the ongoing advice fees. We rarely, if ever, receive an adequate explanation for this, and few firms appear to offer clients a refund when they fail to deliver on their promised service, but how many advisers/firms themselves would pay for nothing?

The pinks are full of indignant commentary, stating that firms have costs, such as PII and regulatory fees to cover, which is indubitably true, but these are payable regardless because they are a mandatory requirement to operate as a regulated business in the UK. One commentator opined that they felt it fair to charge ongoing fees purely because they were available to answer calls whenever the client felt it necessary to get in touch. Really? Bet he doesn’t pay the local plumber a retainer just because he can call him if he gets a leaky pipe.

Our view

There are a lot of excellent firms out there, diligently delivering clients the services they promise and for which their clients remunerate them. Some time ago they calculated what it costs to deliver their services profitably and identified which clients an annual MOT just isn’t necessary for. PROD rules formalised this, but these firms were doing the right thing anyway.

MiFID II changed the landscape for other firms and they adapted to the changes required, revising their propositions and looking at profit rather than turnover, but others have simply carried on in virtually the same vein as they did pre-RDR, with the only real adaptation being trail rebadged as ongoing advice charges. How long will it be before the penny drops that this just isn’t going to cut the mustard any longer?

The FCA is not asking firms to do anything new. Good client outcomes should be the norm, yet some still seem to think that they’re entitled to a chunk of their clients’ money for doing the thick end of naff all. Time for a wake-up call perhaps and the message on 15 February should have set the alarm bells ringing. The FCA says that it will consider its next steps based on the feedback it receives from the 20+ firms it approached a week ago. It probably won’t require the skills of a super sleuth to figure out where this is heading.

Still think that the FCA only calls on other firms and it won’t happen to you?

Author - Paul Jay - Senior Compliance Consultant 

Action required by you

Those firms that still haven’t looked at their target markets and performed a realistic fair value assessment (and there are a lot of them) really need to do something, quickly.

If you haven’t asked for a third party to objectively look at your business model and Consumer Duty preparations it may be time to do so. Contact us to find out how we can help.