To speak to a consultant
Call 0113 239 0011

Regulation & industry news

As one of the UK’s largest financial adviser groups, our expert teams help make sense of FCA requirements and provide their latest thoughts on industry developments.

Home Regulation & Industry News

Ongoing reviews

By Chris McGreavey, Policy Manager | 21st January 2021

In our recent Regulatory Update covering the FCA’s evaluation of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR) we touched on the issue of ongoing advice fees. The intention was to highlight the importance of being able to justify fees that are received through the delivery of service agreements. Industry news recently has included a national advice firm which has been completing a programme of repaying fees to clients who had not been receiving a service. The amount of fees repaid is understood to have been £530,000. We cannot comment on the circumstances surrounding this repayment exercise, but the news serves to remind advisers that ongoing advice fees entail obligations that need to be met.

Suitability review

Where an ongoing advice fee is being paid this means there is an ongoing relationship with the client. This relationship confers the need to undertake a periodic assessment of suitability. In order to complete a suitability assessment an updated Know Your Client (KYC) process is required i.e. update the fact find. You will need to know what the client’s current situation is to be able to advise.

In most circumstances this will mean that there is an obligation to complete at least an annual review. Indeed, this is a specific requirement under MiFiD. Consideration also needs to be given as to whether the client’s circumstances warrant more frequent reviews. COBS 9A.3.9 states: ‘Investment firms providing a periodic suitability assessment shall review, in order to enhance the service, the suitability of the recommendations given at least annually. The frequency of this assessment shall be increased depending on the risk profile of the client and the type of financial instruments recommended.’

You need to ensure there are sufficient systems and controls that manage this process with the review schedule being appropriately diarised. Review meetings do not necessarily need to be face to face, preferences and requirements should be agreed with each client. Once updated KYC is obtained a report can be provided with any personal recommendations and to reconfirm suitability.

Non-responders

There may be occasions where clients do not respond to the offer of an annual review, or decline to complete the process. In this scenario there should still be follow up correspondence to confirm that the review has been offered but declined, and that as a result you are unable to confirm continuing suitability of their arrangements. As well as identifying that their financial arrangements may no longer be fully in accordance with their needs it should highlight that they are continuing to pay fees but are not benefiting from all aspects of the service. We would recommend that comment is included that the client may wish to consider whether they want to continue on the same service agreement basis.

You should establish the reasons for a review process being declined as this may affect the timing or circumstances of future contact. Just because a client may not want to, or be able to, complete an annual review does not automatically mean that they have disengaged with your services. The client choosing to miss one annual review in this way would not automatically mean payment of ongoing advice fees should be ceased. What is important is to be able to demonstrate that the review has been offered and the circumstances why it did not go ahead are legitimate and client led. This should, of course, be fully documented with relevant file notes, records of telephone calls and emails etc. Your file should show that best endeavours have been taken to complete the review process.

Consideration needs to be given to the point at which a non-responding client requires a re-assessment of their servicing arrangements, and the ongoing fee. Where clients do not engage with your services for two or three years it may be that the service agreement should be cancelled. We would recommend that you have a documented policy in this regard and can demonstrate it is applied consistently.

If the reason a review meeting does not go ahead is because it has not been offered to the client then this would be an issue. If an annual review, is missed due to an administrative oversight on behalf of a firm, then efforts should be made to re-schedule as soon as is practicable.

If a firm is unable to meet its servicing commitments due to a lack of resource, then action would need to be taken. This may be to increase relevant resources so they are able to complete the reviews. Alternatively, the firm could consider alternative servicing arrangements for relevant client groups, bearing in mind that simply disengaging with them may not be in line with TCF or the client’s best interests. Fundamentally however a firm should not continue to receive ongoing advice fees if it is not providing the commensurate service in return.

Other services

You should ensure that any other commitments within your service agreement are being delivered. If the client has signed an agreement that promises quarterly newsletters, for example, then these need to be provided.

Delivering value

The rules regarding adviser charges are clear. Among other things, these state that:

  • In determining its charging structure and adviser charges a firm should have regard to its duties under the client's best interests rule (COBS 6.1A.13); and
  • To meet its responsibilities under the client's best interests rule and Principle 6 (Customers’ interests): a firm should consider whether the personal recommendation or any other related service is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account (COBS 6.1A.16).

Pricing of services is a commercial consideration for each firm to decide. The FCA highlighted in the RDR and FAMR evaluation their concerns about price clustering, noting that 80% of clients are charged ongoing fees of 0.5%, 0.75% or 1%. It also noted how a charge at 1% typically does not have noticeably different features to one charged at 0.5%. Advice fees and overall costs have been a focus of much FCA activity recently, including their DB work and the RDR/FAMR evaluation. It may be expected that ongoing advice fees will feature in the FCA’s Assessing Suitability Review 2, which has been put on hold due to COVID-19. All of which serves to highlight the importance of being able to demonstrate that value is being provided for the associated fee.

Demonstrating value is likely to require three considerations:

  • Are services actually being delivered?
  • Are the services that are being provided what were originally promised?
  • Are the services appropriate for the client segment?

In relation to the last point, product governance is covered in the PROD section of the handbook.

PROD 1.1.3 identifies that:

good product governance should result in products that:

  • meet the needs of one or more identifiable target markets;
  • are sold to clients in the target markets by appropriate distribution channels; and
  • deliver appropriate client outcomes.’

You should be able to show what your client’s value in the services you provide, that there is clarity on what will be provided and that ongoing services are appropriate for their needs. Pricing should be fair and reasonable. The FCA would expect firms to be able show that they have completed a genuine assessment of the costs of providing a service, and that the resulting fees deliver value for money for clients. A charging structure that has been chosen because ‘That’s what other firms charge’, or even because ‘That’s how much I can get away with charging’, is unlikely to meet FCA and client’s best interests requirements.

Tenet Compliance Services support

Tenet Compliance Services logo

It is clear that providing ongoing servicing is a critically important area. Shortcomings run the risk of dissatisfied clients and regulatory censure. Ultimately, if a client is paying for a service, but they do not receive that service, firms will need to look at repaying fees.

You should regularly review your firm’s provision of ongoing services and charging structures to ensure they underpin both your firm’s profitability and client understanding of value. It is not unusual for an effective charging structure and service model to evolve over time.

We can assist firms in in assessing the extent to which they are fulfilling their commitments under ongoing service agreements. We can review client segmentation, service agreement design, and implementation. Focused file reviews can be completed to assess how review requirements are being completed in practice. We can provide a full report on findings with detailed recommended actions.

For professional adviser use only

Want to know more?

To talk to us about any of the topics mentioned here, or to find out more about Tenet and our breadth of services, call us today on 0800 085 0825 or email joinus@tenet.co.uk for more information.

VIEW FULL ARTICLE   CONTACT US

Making A Complaint

Privacy Statement | Disclaimer | Modern Slavery Statement | Gender Pay Gap Report

Statutory Accounts 2018 | Statutory Accounts 2019

Registered in England and Wales No. 3909395. VAT number 712 0544 79.

Tenet Network Services is a trading style of TenetConnect, TenetConnect Services and TenetLime.