Despite reforms designed to bolster transparency, clients are still at risk of being misled about the costs of investment advice, a new review by British regulators finds.
A review of the disclosure provided by financial advisors in the UK found that 73% of firms are failing to provide the required information on the cost of advice, according to the UK’s Financial Conduct Authority (FCA). The finding comes in the latest review of the implementation of the UK’s fundamental reforms, known as the Retail Distribution Review (RDR) reforms.
The RDR, which came into force in January 2013, introduced new disclosure requirements to improve transparency for consumers. “The aim was to ensure that consumers have the information needed to make informed decisions, and are clear on the costs and services of advisory firms to improve competition in the market,” the FCA says. However, it finds that too many advisory firms are not being clear with consumers on how much advice costs, the type of service they offer, and the ongoing services they provide.
Canadian regulators are engaged in a similar exercise with phase two of the Client Relationship Model (CRM 2) reforms, which are designed to improve disclosure about the costs of investing, among other things. Those reforms don’t fully take effect until 2016.
In its review the FCA found that “despite sufficient time and the straightforward nature of the requirements, issues remain”, which could result in clients being misled about the cost of advice, the type of service offered by a firm, and the service they can expect in return for ongoing fees.
In particular, the review found that: 58% of firms failed to give clients clear upfront generic information on how much their advice might cost; 50% failed to give clients clear confirmation on how much advice would cost them; 58% failed to give additional information on charges; 31% of firms offering a ‘restricted’ service were not clear that their advice is restricted; and, 34% failed to provide a clear explanation of the service they offer in return for an ongoing fee and/or their right to cancel this service.
‘RDR has involved a major change to the investment advice landscape. While we have seen a lot of positive progress and willingness by advisors to adapt to the new environment, I am disappointed with the results of our latest review looking at whether advisors are clear with their customers on costs and services provided,” said Clive Adamson, director of supervision at the FCA.
The FCA says that these failings are widespread across the industry, but that wealth managers and private banks performed worse than other firms in nearly all aspects. It also notes that two firms with egregious failings will likely be referred to enforcement; this includes one financial advisory firm and one wealth management firm.
The regulator will be starting the third cycle of its review in disclosure in the third quarter of 2014.