The FCA has outlined the importance of clear communication with clients for acquisitive advice firms, many of which could go much further in terms of fair treatment, writes Rory Percival, director of Rory Percival Training and Consultancy.
Last month the Financial Conduct Authority (FCA) published a supervision review report on acquiring clients from other firms. This followed the regulator’s report on the approaches undertaken by consolidator firms.
The paper is a useful guide, not only for consolidators and other firms acquiring client banks, but for any firm that plans to change the ongoing service proposition it offers to clients. Like most of the FCA’s supervision reports, it is short (only six pages), to the point, and well worth reading.
Fair practice
The paper focuses on how firms deal with changes to the ongoing service proposition and what treating customers fairly (TCF) looks like in practice in this scenario. In my experience, firms usually claim to be TCF, but scratch the surface a bit and this is not always the case. Interpreting the tone of the FCA publication, it seems to me it found a number of concerns – including important ones – but the findings were not horrendous.
The core of the FCA’s message is to think clearly about clients’ potential information needs and design communications to meet these. In particular, firms should:
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Set out the differences in the old service and the new one. I would use a simple, easy-to-compare table.
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Restate what services are provided if there are no changes in the service level, and do not rely on the original disclosure that could have been completed several years previously. The client may not recall this detail and the original disclosure may not have been adequate: the FCA has found failings in this area previously. Remember to include a full explanation of what the review includes. The FCA has previously stated more detail needs to be provided than, for example, an annual review.
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Disclose the total adviser charge in cash terms, and if the charging basis is percentage-based, explain the cash amount will vary as the funds do.
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Explain the client’s right to cancel ongoing services, and how to do this.
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Explain whether the responsibility for the original advice has been taken on by the new firm.
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Explain any difference to the tax (VAT) status of the ongoing adviser charge.
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Communicate at the start of the new arrangement so the client is aware of the new services, and the resulting charges, before they are provided.
Law and order
Firms should check the legal nature of the old contracts and whether they are still valid after acquisition. If they are not, a new contract will need to be drawn up. This has to be undertaken with each client, as well as obtaining consent from each client to collect the ongoing adviser charge from the provider.
This is required as the rules state providers who are facilitating the adviser charge must obtain and validate the client’s instruction to pay adviser charges to the advice firm.
In addition to the communication requirements, the FCA referred to suitability of advice, particularly if the new firm has a different centralised investment proposition. All advice must be suitable and firms must act honestly, fairly and professionally, in accordance with the client’s best interests.
The regulator repeated its expectations that cost comparisons should be included in suitability reports for replacement business. This is currently guidance but becomes a rule under Mifid II in January 2018.
The report sets out the FCA’s expectations in this area and is a must-read for anyone considering acquiring another firm or simply planning on a change to their service proposition.