Almost three quarters of advisory firms are failing to inform clients of the true cost of advice, says a 'wake up-call' review from the Financial Conduct Authority. Two firms are at risk of enforcement action.
The FCA claims some consumers may be unaware of, or are even being misled, in relation to the cost of advice. Some 73 per cent of the advisers reviewed were not giving clear explanations of initial and ongoing fees.
The figures also show 34 per cent of advisers are not transparent about the service they offer in return for ongoing fees, and are failing to let clients know they have the right to cancel this service.
Moreover, 31 per cent of firms who offer a 'restricted' service - advising only on specific financial products - are not making clear that they are restricted.
'It is important that all adviser firms are clear and transparent about the costs of their services,' says Chris Hannant, director general at the Association of Professional Financial Advisers (APFA).
'The FCA's findings suggest that a number of firms are failing in this regard, and those firms urgently need to make changes to address this.'
The findings are part of a review, the second of a three-cycle assessment of how firms have implemented requirements of the Retail Distribution Review (RDR). RDR came into force at the beginning of 2013 and introduced new disclosure requirements to improve transparency for consumers.
'RDR has involved a major change to the investment advice landscape,' says Clive Adamson, director of supervision at the FCA.
'While we have seen a lot of positive progress and willingness by advisers to adapt to the new environment, I am disappointed with the results of our latest review looking at whether advisers are clear with their customers on costs and services provided.'
The FCA will start the third cycle of its review in the third quarter of 2014. If, at that point, firms are not complying with the rules on disclosure, the FCA says it will consider further regulatory action.
It confirms two firms with 'egregious failings' are already lined up for referral to its Enforcement and Financial Crime Division. This includes one financial advisory firm and one wealth management firm.
Widespread industry failings
Failings appear widespread across the industry, but the FCA says the performance of wealth managers and private banks were poorer than other firms in nearly all respects.
'We will be helping the industry again to understand our requirements with the release of a video guide, but these results are a wake-up call and we expect the industry to respond,' says Adamson.
Hannant at APFA believes most advisers are working hard to meet new requirements, and points to the FCA's previous report on delivering independent advice which found the majority of advisers were fulfilling the new rules.
'We will be working closely with our members to ensure all advisers understand what the regulator requires of them and that they are meeting its expectations on charging, as well as in other areas,' he says.
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