A final call for compliance…!

The Financial Conduct Authority’s second thematic review (TR14/6) highlights significant levels of non-compliance with the Retail Distribution Review. Here we examine the shortcomings found and the implications for financial advisers and their insurers.

In April 2014 the Financial Conduct Authority (FCA) published the second stage of its review of the implementation of the Retail Distribution Review (RDR) by financial advisors. While the results were said to be concerning for consumers, we consider below the implications for financial advisors and their insurers.


Many will be aware of the RDR, which came into effect on 31 December 2012. Its chief aim was to provide better consumer protection within the retail investment market, by ensuring clients understood:

  • The type of services offered by their financial adviser
  • The way their financial advisor would be remunerated
  • The nature of the services to be provided by their financial adviser

To monitor compliance with the RDR, the FCA has embarked upon a three-stage thematic review. So far, only the first and second stage reviews have been undertaken, with the results published in reports dated July 2013 and April 2014 respectively. The third and final stage of the review is to be undertaken later this year.

The latest results

According to its second stage report (TR14/6) and having audited 113 firms from a cross-section of the industry, the FCA found that:

  • 31% of restricted firms failed to disclose the fact that their advice is/was restricted
  • 58% of firms were not being clear about the cost of their advice
  • 34% of firms failed to accurately describe or scope the services for which they were being retained

The FCA has described the incidents of non-compliance as “widespread” and “unacceptable”. It has also issued a stark warning that firms must face the consequences if they are still not compliant when it conducts its final review.

Independent or restricted advice

According to the RDR, to be “independent”, the firm must consider and advise on all retail investment products. Otherwise, it must declare that its advice is “restricted”.

This failure by firms to declare themselves as restricted should be an easy fix: the adviser just needs to tell its clients that its advice is restricted. This is the solution envisaged by the FCA, but it arguably overlooks the negative connotations of being seen as limited in some way. In a competitive market place, it is understandable that some firms may have been coy about their status.

The cost of advice

In compliance with the RDR, firms must give clients clear, upfront information about how they charge for services and the level of their fees.

Again, while this omission should be easy to resolve, it has been suggested by some that a number of firms, concerned that their charges may be uncompetitive, are deliberately avoiding upfront conversations with clients about costs. This could be because those firms are still coming to terms with the fact that under the RDR they are no longer permitted to charge on a commission basis.

The nature of services

Firms must provide clear and transparent advice about the services for which they are charging clients. The FCA wants more certainty around the scope of the retainer, especially when ongoing services are provided.

For those firms that provide a value added service, it is not easy to see why they would not take steps to declare the continued support and assistance they provide to their clients. For those that do not, there is undoubtedly much less of a commercial incentive to do so.

The implications of non-compliance for advisers and their insurers

While a scathing criticism of the profession generally, the fact that the FCA is likely to refer only two firms to its enforcement and financial crime division for “egregious failings” suggests that it has some sympathy for firms who have struggled to come to terms with the RDR. However, the FCA will not be as lenient in the future.

Further, and for many firms, non-compliance with the RDR is likely to carry with it a number of adverse commercial implications. They may include:

  • Increased risk of fee disputes – failing to provide clarity around fees and ensuring that costs are monitored invariably increases the risk of default and disputes with clients.
  • Increased risk of complaints/claims – the lack of a detailed retainer letter setting out precisely the scope of services the advisor will and will not provide can also lead to disagreement and heighten the risk of complaints to the FOS as well as professional negligence claims.
  • Increased cost of professional indemnity insurance – a track record of non-compliance with the RDR may be regarded as poor risk management and lead to higher premium quotations and/or the need for higher additional capital reserves.
  • A lost marketing opportunity - for restricted advisors who give advice on a daily basis in respect of a finite range of products, the chance to positively publicise their specialism may not be fully realised.
  • Reduced goodwill – a lack of understanding and general uncertainty is unlikely to inspire the degree of trust and confidence that leads to personal recommendations and endorsement from clients.

The RDR seems here to stay and there would appear to be a good number of reasons to comply with it. Those firms that don’t may be in for a rough ride, not just from the FCA but from their clients and insurers too.

Our content explained

Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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