Adviser charging: What action to take on your disclosure documents
What does the FCA require in the generic and specific disclosure of charges? ATEB Consulting’s Steve Bailey looks at adviser charging rules
The FCA rules require adviser charges to be disclosed both generically and specifically. Firms must disclose both:
(a) The generic charging structure (COBS 6.1A.11); and
(b) The client specific total adviser charge payable (COBS 6.1A.24).
The charging structure (a) is exactly that, a structure; think of it like a restaurant menu, which if you like it you can order from it or if you dislike it you can walk away from. We all know that most customers don’t buy financial products in this way, but the FCA believes that this approach promotes competition and protects consumers. Here, (a) is disclosed in ‘up front’ disclosure documents, such as initial disclosure documents, proposition documents or terms of business.
Once you’ve decided to order, you know how much the meal is going to cost, so when you utter those immortal words to the waiter “I’ll have the lobster thermidor if you please my good man“, you’ve effectively entered into a verbal contract which is confirmed by the bill and which should contain no surprises so long as you haven’t forgotten about the second bottle of wine. This is like (b) above, and will typically be disclosed in client specific documents, like fee agreements, engagement letters or client agreements.
The rule requirements for (b) are fairly complex, however, and it is apparent from research conducted by the FCA that many firms are failing to disclose the client specific total adviser charge correctly.
When to formalise the charging structure
In accordance with COBS 6.1A.25, a firm may include the information required by the rule on disclosure of total adviser charges (b) in a suitability report. ATEB would urge caution in this respect, however, and our recommendation is that the total adviser charge be confirmed in the suitability report, but formalised much earlier in the advice process in a separate, additional document. There are numerous reasons for this:
- The FCA rule requires the disclosure of (b) ‘as early as practicable’; while this is not defined, we suggest it should be as early as is feasibly possible because it cements the financial agreement between you and the client. If you disclose (b) in the suitability report, you have already undertaken significant work to prepare the recommendation before disclosing the total charge to the client and hence the client may dispute or refuse to agree to the charge.
- Although recommended, not all suitability reports will be issued pre-sale. Post sale suitability reports may not meet the ‘as early as practicable’ requirement.
- There are numerous additional and specific requirements for the disclosure of (b) (see COBS 6.1A.24 onwards and the FCA disclosure assessment template below); therefore, a specifically designed document like a fee agreement, will better cater for these requirements.
To be clear, therefore, while you should always disclose all fees and charges in the suitability report, to avoid potential non-disclosure and breach of the total adviser charges rule (b), we recommend that a separate and tailored document be used for this purpose, which should be issued early in the advice process.
One final point, the disclosure of fees in (b) should be in cash terms wherever possible. So, if you’ve agreed a fee of 2% for a £100,000 investment, disclose this as £2,000. If you cannot be exact, for example because the fee will depend on the value of investments being switched, then provide accurate examples based on the anticipated value and confirm the exact amount as soon as possible, in writing, post sale.
Action required by adviser firms
The fee disclosure rules introduced with RDR are a fundamental requirement and there is evidence that firms are failing to understand their obligations in this respect.
Please take time to read and understand COBS 6.1A. Here’s the link:
Then, use the FCA disclosure assessment template to objectively assess your standards.
Following concerns raised about firms’ disclosure of charges and services post RDR, the FCA has published an assessment template to assist firms to review their documentation.
The FCA plans to use this template to assess firms’ disclosure when carrying out their reviews.
They expect to see significant improvements in this area and if they continue to identify firms that are failing to meet the disclosure requirements, they will consider what further regulatory actions are appropriate.
The use of this template is not compulsory, but all firms are encouraged to use it to assess standards and to make any necessary changes to their client facing documentation. A copy of the assessment template should be retained.
The Disclosure Assessment template, together with accompanying notes and explanatory video, can be accessed here. : http://www.fca.org.uk/news/thematic-reviews/tr14-6-supervising-retail-investment-firms
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Further useful supporting documentation can be found below: