Ongoing advice charges

March 2024

Following the introduction of the Consumer Duty, the FCA has wasted little time in putting its new supervisory toolkit into action.

Following its December 2023 intervention on retained interest, adviser charging is its next focus. The FCA has identified that some customers are being charged for annual reviews but are not receiving the service they are paying for. Its information request to 20 of the largest advisers is likely to have wide-ranging implications for the financial advice market.

This article recaps the FCA's requirements and expectations and explains how all firms providing an ongoing advice service should take proactive steps in response.

Recap of the FCA's requirements

The annual review is an important opportunity to take into account any changes to a customer's circumstances (such as vulnerability or risk appetite) that could impact the suitability of advice and its value. 

There can be many reasons for a customer not taking up an annual review — these may be customer-driven or due to internal governance and oversight failures. 

The challenges for firms will be ensuring that customers fully understand the service they are paying for, it meets their needs, and being able to evidence the service provides fair value. Firms will need to consider various factors to decide whether it's appropriate to continue taking an annual advice fee.

As a starting point, firms should review their implementation of the Duty, any work undertaken to date on ongoing advice services against the four outcomes, and relevant MI and evidence obtained around customer outcomes.

Firms can then move on to gathering data (including from Appointed Representatives (ARs), where relevant), reviewing customer records, and understanding the potential scale of changes needed and any remediation due — see more detailed steps below.

The FCA's focus is highly likely to be expanded beyond the initial 20 firms it has written to. Therefore, all firms providing ongoing advice services should take steps immediately to identify whether they are aligned with the FCA's expectations. These steps should include:

1. Examine the ongoing advice annual review process

• Check the annual review process meets the FCA's requirements under the relevant, specific rules (see above) and the Consumer Duty.
• Examine the policies and procedures that underpin the annual review cycle and its oversight. Check they clearly document the firm's approach, including what constitutes an annual review, its format, sign-offs, internal monitoring, AR due diligence and oversight arrangements and how the output is evidenced. 
  
• Review the effectiveness of systems and controls that support the process.
  
• Review processes and procedures relating to the suitability of advice (initial and ongoing). Ensure this addresses the FCA's previously highlighted concerns (e.g. around staff incentives, documentation and oversight).
• Review the client communication strategy (e.g. how many times you attempt contact, and the clarity of communications explaining the review and the service you are providing).
  
• Consider the framework and triggers where you would stop taking the advice fee.
  

2. Identify and analyse customer data

• Identify and categorise clients in line with the FCA's approach, including:
  • The number of clients that receive ongoing advice and are due a review.
    
  • How many actually received advice.
    
  • How many paid for the service but were refunded when the review didn't happen.
    

3. Review the fair value assessment

• Consider the FCA's communication on ongoing advice and previously published good practice and areas for improvement — thoroughly review the fair value assessment for this service.
• There should be a particular focus on the service's benefits and costs, based on activity-based costing and a breakdown of the costs of providing the service — also considering scenarios where the customer doesn't receive the service they have paid for.

Having completed these initial steps, some firms may identify consumer harm and that potential redress may be required. 

While firms await further communication from the FCA on its precise expectations, firms that have identified harm should consider commencing a more detailed review, taking account of the following considerations:

1. Determine redress policy and risk appetite: A clear policy needs to be agreed upon, to allow for consistency in file review and redress.
   
2. Define redress methodology & calculations: Create a robust and comprehensive methodology to enable accurate calculation of redress, including its various components, such as advice fee refund and compensatory interest. A redress calculator should be developed.
   
3. Develop remediation strategy: Considering the scale, duration and cost of any remediation — such as proactive vs reactive remediation, customer contact strategy, operational capacity and location considerations. Automation and technology solutions should be incorporated in the strategy where possible.
   
4. Prepare for a potential increase in complaint volumes: Review and enhance your complaints strategy to deal with issues at scale under different scenarios (e.g. driven by media coverage, activity from Claims Management Companies (CMCs) or FOS referrals). This should consider increasing capacity alongside clear training and guidance.
   
5. Determine approach to external communications and public relations: Firms should develop a communications strategy, considering engagement with all stakeholders: customers, relevant third parties, the press, FCA/FOS and CMCs.
   
6. Consider legal support: Consider whether external advice is required, the need to develop or update the legal strategy around any potential connected litigation and providing support in any FCA/FOS engagement.

• Identifying impacted clients: There may be some outstanding data gaps that need to be identified and addressed. Gathering data from ARs in particular may take some time and could require additional work to collate in a consistent format.
  
• Timeframe of the review: How far back to go with the review and the “as at” date to use for identifying the client population.
  
• Stance on lack of client response: If a client doesn't take up their scheduled annual review, how is it decided whether they should be charged or not — including where a customer inconsistently takes up the review.
  
• Evidencing decisions: Careful consideration will be needed around the approach to identifying and gathering appropriate evidence to support decisions made (e.g. on value assessments or suitability reviews) in order to support any potential redress calculations.

We offer multi-disciplinary professional services that enable us to support clients across a wide range of activities through Consulting, Legal and Managed Service businesses.

• Regulatory and Remediation experienced consultants — KPMG consultants can support you on any of the above suggested actions.
• Technology and Data Analytics specialism — We can support you with the identification and validation of the affected customer population and with outcome testing technologies.
  
• Redress Methodology & Calculation — We have substantial experience of redress calculator design for industry-wide issues. KPMG consultants can support you with defining a detailed redress methodology, as well advice on the building, validation or automation of redress calculators. 
  
• KPMG Legal support — KPMG Law professionals have  significant regulatory and disputes readiness experience - including legal support through the strategy and remediation process. 
  
• Managed Service solutions — KPMG's managed service provides a range of operational approaches, including capacity management, resource augmentation, operational execution and delivery. We benefit from an onshore, specialist Remediation Academy.