Platform rules – thematic review

In March 2014, the FCA carried out a thematic review on the preparedness of the platform market to new rules that came into force on 6 April 2014. These new rules were the first extension of the existing rules that were implemented on 31 December 2012 for the Retail Distribution Review. The FCA engaged with 10 platforms which, combined, represented 75% of the platform market. As part of this thematic review, the FCA noted some examples of good practice and areas where further focus was needed. The FCA highlighted the following areas as requiring further focus by firms:

  • impact on consumers – firms are not doing enough in altering their business models to ensure that the impact to consumers was the key consideration, not the bottom line of the firm;
  • customer communications – firms are not doing enough to ensure that customers really understand the changes that are occurring and its impact on them, in particular, paying a platform charge. The FCA highlighted the following as examples of good and bad practice it found:
    • good practice – providing tools for advisers to help them illustrate changes to consumers along with tailored communications directly to each consumer; and
    • bad practice – blanket communications telling consumers that most people will be better off without a sufficient explanation of the impact on the consumer.

The FCA has highlighted this as an area for further group discussion;

  • previously advised customers – firms are not considering the difficulties that customers who had previously been advised may face in understanding the changes (where their adviser is not assisting them);
  • contingency planning – the FCA has not seen as much focus on contingency planning as they expected to see. The FCA expects to see plans developed to address:
    • when consumers do not respond as predicted; and
    • when the technology does not work.
  • re-registration – transferring investments from one platform to another. New rules will be implemented to speed up the transfer times; and
  • exit charges – there should be no barriers to transferring investments.

RDR – thematic reviews

In March 2014, the FCA finished the second of its thematic reviews into how advisory firms were implementing the RDR.  As a result of this second phase, the FCA issued its findings in two specific areas of focus of the thematic review, the first, on delivering independent advice (TR14/5 – March 2014) and, the second, on being clear about disclosing adviser charges and services (TR14/6 – April 2014).

Delivering independent advice (TR14/5)

The FCA found that a significant number of firms included in the review (58 out of 88 firms) understood the requirements for delivering independent advice and appeared to be delivering it in practice. Of the remainder, the FCA found that 12 firms were either not acting independently or there were doubts on their independence. The FCA reiterated that while ‘independent’ advice requires a comprehensive and fair analysis of the relevant market, ‘comprehensive’ does not require that every product is considered, but rather every product type from the relevant market is considered to find the most appropriate investment solution for the client and then detailed due diligence on the recommended investment solution.

As the industry appears to find the practical implementation of the independence requirements challenging, the FCA issued some examples of good practice and bad practice to provide further clarity. These examples sit alongside the existing finalised guidance on independent and restricted advice (FG12/15). The key messages are as follows:

  • to be independent, firms and advisers must be able to advise on all types of retail investment products (RIPs), including advising on non-mainstream pooled investments (including unregulated collective investment schemes although these are unlikely to be suitable for the majority of retail clients);
  • firms adopting a single platform need to carry out sufficient research/due diligence on other options available and/or consider off-platform investments. The FCA stated that in its view, it would be “very rare” for a firm to use one platform for all clients and be independent. Firms also need to ensure that any platforms used comply with the new rules that apply to platforms. A single platform could be used in circumstances where it was recognised that it may only be relevant for some of the firm’s clients and off-platform solutions were facilitated;
  • firms using a panel need to ensure the panel is correctly compiled, regularly reviewed and updated. A single panel can be used where it is originally compiled from a whole of market review and of all RIPs. The panel should be regularly reviewed and advisers should know what is not on the panel in order to identify when an off-panel solution may be best for a client;
  • advisers cannot refer clients to other internal or external advisers to advise on certain RIPs where they are unable to and remain ‘independent’. Firm specialists on specific RIPs can be used in circumstances where the existing adviser gives the final advice. Similarly, licensing arrangements (with firms that have product specialisms) need to be assessed to ensure the adviser can continue to be considered to be independent;
  • networks need to ensure that all appointed representatives met independence requirements;
  • creating a narrow ‘relevant market’ by reference to a product category (e.g. pensions) is not an appropriate relevant market. Narrow relevant markets may be applicable in certain areas (e.g. ethical products; Islamic products) where it has been assessed that this market is appropriate to all of a firm’s clients;
  • model portfolios (either created by the firm or from a third party) can be used where they are constructed appropriately (from comprehensive and fair analysis of relevant market) and appropriate to the needs of clients (meaning that other options outside the model portfolios may be appropriate in certain circumstances); and
  • firms need to ensure they know when a referral to a discretionary manager is a personal recommendation (and therefore needs to be subject to independence rules) or not.

Being clear about adviser charges and services (TR14/6)

The FCA found significant failings in this area with firms failing to correctly provide the required information on the cost of advice, the type of service offered (independent or restricted) and what on-going services they would provide. With the previous FCA communications on this topic, including the good and poor practice set out in the FCA’s findings from the first thematic review (TR13/05), the FCA believed significant improvements should have been made and have warned that additional regulatory action will be taken if they find that firms are not incorporating their comments. Already, the FCA stated that it will likely refer two firms to its enforcement division.

In particular, the FCA found the following of the 113 firms surveyed and expressed the following further views:

  • 58% of the firms did not correctly disclose to clients the generic information on how they charge for advice:
    • percentage-based charging structures must use cash examples;
    • hourly based charging structures must include an indication of the number of hours that each service is likely to take;
    • indicative hourly rates must show the basis on which they vary; and
    • where both percentage-based and hourly-based charging structures are used, need to clearly disclose what basis would be applied and when.
  • 50% of firms failed to clearly confirm the specific cost of advice to individual clients:
    • percentage-based charging structures must disclose the actual cash amount to clients; and
    • the client-specific disclosure must be disclosed as soon as possible and must be disclosed in a durable medium.
  • 58% of firms failed to give additional information on charges, for example, not highlighting that ongoing charges may fluctuate and when the charges will be incurred:
    • with percentage-based ongoing charging structures, it needs to be made clear that fees will increase as the fund grows; and
    • it also needs to be clear when the client will start to incur the charge
  • 31% of firms offering a ‘restricted service’ were not clear that they were restricted and how:
    • firms need to disclose that they are ‘restricted’ if they are restricted and use this word in disclosure documents;
    • the nature of the restriction needs to be disclosed; and
    • there should be no contradictory information on the nature of the restriction.
  • 34% of firms failed to set out the extent of the ongoing service offered and/or the right to cancel the ongoing service:
    • firms need to disclose what service the client will receive for the ongoing fee;
    • firms need to disclose that the ongoing service can be cancelled at any time and how; and
    • firms need to have a robust procedure for ensuring they deliver the ongoing service.

The FCA’s third thematic review will commence in the third quarter of 2014.