In an ideal world, how often should an adviser meet with their client? And how much should they bill them for it? These questions came to the fore last week, thanks to the Financial Conduct Authority (FCA) challenging advisers on the service they provide.
The FCA has been concerned for years that clients aren’t getting full value for their annual advice charges. On 15 February 2024, the regulator wrote to 20 of the UK’s biggest advice firms telling them to provide information on exactly what they are offering. It asked if they have considered the Consumer Duty and, if so, whether they have changed anything. It also asked how many clients are due a review and how many are owed a refund if they didn’t get the review they paid for.
The regulator has previous in this area. Back in 2018, it probed advisers’ ongoing charges and found they had increased without necessarily adding more services since the Retail Distribution Review (RDR). In 2021, a strategy to support consumer investing included a push to ensure the public trusted advisers to deliver fair value. In late 2022, the FCA sent a letter to the sector covering the same theme of investors getting what they pay for. It sent another such letter in early 2023, then returned to the issue in a webinar at the end of last year.
The FCA hasn’t revealed the potential sanctions for any firms it deems are falling short in this area; nor has it made the full survey public. But its decision to start a formal probe has caused rifts in the profession that will be tough to resolve.
A genuine issue?
The reactions to the regulator’s crackdown include disbelief that such things could still be going on and astonishment that the FCA would waste its time on such a non-issue. Kusal Ariyawansa, a chartered financial planner at Appleton Gerrard, wrote; ‘Surely no one refuses to see fee-paying clients?’ However, the answer to that question, unfortunately, is yes.
In Australia, after the Hayne royal commission, regulators took legal action against Mercer Financial Advice over allegedly breaching such rules more than 5,000 times. All four of the country’s biggest banks were caught up in the fees-for-no-services scandal. Across the market, estimates were that nearly AU$900m (£468m) in compensation was due.
“I come across plenty of people that haven’t heard from their adviser for years,” wrote Adam Carolan, founder and head of strategy at NextGen Planners. “This initiative from the regulator is really going to help the good firms.”
Yet is the regulator overstepping the mark here? More to the point: do advisers have sufficient information to understand whether they would pass any value-for-money test the regulator might impose?
The head of public affairs at Pimfa, Simon Harrington, wrote: ‘This ongoing game of regulatory cat and mouse using an outcomes-focused tool to make prescriptive judgements is as tiresome as it is unhelpful. The FCA needs to set out what it thinks “good” is if it’s going to continue this approach.’
Choosing the right targets
The divides in the profession go deeper than just a split between those who think ongoing charges are broadly fine and those who think a firm hand is long overdue. The FCA’s crackdown will also shed light on the difference between business models.
Consolidators, for example, have been passing clients from pillar to post as the pace of mergers and acquisitions has increased. Some clients due their yearly catch up with their adviser might well slip through the cracks as firms are acquired. Similarly, some of the personal touch that sees many smaller advisers check in with their clients far more often than once a year may be lost as firms grow in size.
National players may be wondering why the FCA is going after the 20 biggest planning businesses in the market when small firms and individual practitioners are more likely to lack the capacity to serve all their clients properly. Such firms perhaps don’t have the systems and processes in place to make sure every client gets a proper review.
The regulator is certainly treading a fine line. In the post-RDR, post-transactional advice world, ongoing services are what matters. Advisers who focus on life planning and coaching, say, wouldn’t want to trim their annual fees and not get paid what those offerings are worth.
Reaching all parts of the market
The regulator’s move will affect every single adviser in the UK market. A 2021 FCA review found that more than 80% of ongoing charges are clustered around three price points – 0.5%, 0.75%, and 1% – when the service delivered varies significantly. This suggests there is cause for concern.
When it comes to ongoing advice, more than two-thirds of advisers charge percentage fees or a combined structure, rather than just a fixed fee that could more easily be linked to an individual review, say. The likelihood is that a resource-stretched FCA is likely to crack down on just a few of the worst offenders. Just don’t expect advisers to agree on who those are when it happens.
Photo by Federico Burgalassi on Unsplash
