The Financial Conduct Authority (FCA) has found that over 40 percent of firms do not comply with the regulator's disclosure rules.
The FCA revealed in its Assessing Suitability review that 41.7 percent of the financial advisory sectory provides unacceptable disclosure with 52.9 percent providing acceptable disclosure and 5.4 percent uncertain.
The assessment of disclosure considers three distinct elements: the firm’s initial disclosure, the product disclosure and the disclosure in the suitability report. The results of the review show that the area where there is the highest level of unacceptable disclosure is with firms’ initial disclosure, which includes firms’ costs and services. The main issues were: firms disclosing charging structures with wide ranges; and firms using hourly charging rates failing to provide an indication of the number of hours for the provision of each service, rather than firms failing to provide any cost information.
Looking at suitability, the regulator found that 93.1 percent of the sector provides suitable advice while only 4.3 percent was unsuitable. The FCA considers that these are positive results for the sector and believes that they are a result of the successful adoption of the Retail Distribution Review (RDR) by advisers and reinforced by previous supervisory and enforcement activities. However it did find that in many cases suitability reports were too long and complex.
While the overall level of unsuitable and unclear advice is low, the review tended to identify issues in two key areas:
- Risk profiling, where firms were not considering or mitigating the limitations of the risk profiling tool they used or where the recommended solution did not match the risk the customer was willing or able to take.
- Replacement business – Where firms were recommending that customers give up valuable guarantees without good reason or where the additional costs appeared to outweigh the benefits of the recommended solution.
A communication programme over the course of 2017 and into 2018 has been planned, where it will share more detail on the findings, including communicating examples of good and poor practice.
The FCA also noted that some important changes are coming to the advice and disclosure requirements through the Markets in Financial Instruments Directive II (MiFID II), the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) and the Insurance Distribution Directive (IDD). This will lead to increased requirements for financial advisers in many areas. The FCA advises firms that they need to ensure that they take note of the new requirements and make any changes necessary.
It is the intention of the FCA to repeat this review in 2019. This will be based upon advice delivered in 2018 and the regulator will measure how the results have changed since 2015. This will also allow the assessment of how firms have implemented the requirements introduced by MiFID II, PRIIPs and the IDD.
The review assessed 1,142 individual pieces of advice given by 656 firms against the suitability and disclosure rules in the Conduct of Business sourcebook.