The road ahead on suitability and disclosure

When it comes to looking after clients, everything starts with suitability. For many good advisers and planners out there, suitable advice is given as a matter of course. Yet despite this, and in part due to increasing concerns around defined benefit pension transfer advice, much of the regulatory activity over the last decade has been focused around the theme of suitability, and crucially evidencing this as part of your business processes.

A woman using a tablet computer

"Advisers say they are generally comfortable with most of MiFID II, though they also say they don't always have the info they need to communicate the true cost of investing to clients"

Suitability and due diligence are things we spend a fair bit of time on here at the lang cat, and we distilled our finest thinking on this in our recent-ish report 'Let the Suitable One(s) in'. In it, we set out two key principles which we think are driving regulatory change:

  1. Transparency and understanding – Clients should be presented with a clear view on what they're paying to whom, and what they get in return. This is the driving force behind the rules on MiFID II costs and charges (more on that later).
  2. Suitability – Client needs trump all. Simples.

With that in mind, we thought it'd be worth looking at where things stand regulation-wise on suitability and disclosure and what's coming down the track. We also want to spend some time on arguably advisers' least favourite piece of regulation – MiFID II – and in particular, on costs and charges.

So, let's get into it…

The regulatory backdrop

It emerged recently that the FCA has decided to scrap its planned Assessing Suitability 2 review. The review, first trailed in January 2020, was due to examine retirement income advice in the wake of pension freedoms.

The decision was largely welcomed by advisers. But alas, this one piece of cancelled work does not mean everything is rosy in the garden. We only need look at what's happening elsewhere in the market to see the related issues of value and disclosure are still very much front and centre of the FCA's agenda.

Around the same time the Assessing Suitability review was taken off the table, the regulator was busy finding fault with fund groups' assessment of value reports. The FCA found reports were sometimes based on questionable assumptions, and found shortfalls in how firms determine good value. The regulator also plans to change some of the technical standards behind disclosure documents provided to retail investors.

Granted, much of this stuff is aimed at people other than advisers. Yet the direction of travel shows a regulator which continues to be concerned about the things we set out at the start: transparency, disclosure and suitability.

A note on Brexit and the new Consumer Duty

In particular, the FCA's proposals to change disclosure documents reflect a few developments, some of which are more interesting than others. Perhaps least interesting was the announcement itself – that the regulator wants to change the calculations that sit behind performance and risk information as part of Key Information Documents (KIDs).

What is more interesting (to us at any rate) are the reasons the FCA gave for taking action: Brexit and the FCA's consultation on a new Consumer Duty.

Let's look at Brexit first. The regulator says KIDs in their current form have the potential to contain misleading information, but have been designed in line with EU regulation on Packaged Retail and Insurance-based Investment Products (PRIIPs). As a result, the FCA is looking to take our exit from the EU as the UK's chance to "diverge from EU PRIIPs regulation to better protect its consumers."

You might think it's a bit of a stretch to describe any of that as 'interesting'. But stick with me. Where the dots start to join up is what the FCA says about its proposals for a new Consumer Duty, and the interaction this could have with our newfound Brexit regulatory freedom.

For the uninitiated, the FCA set out its plans for a new Consumer Duty in May, with the hope of setting "clearer and higher expectations for firms' standards of care towards consumers." The consultation closed on 31 July, with a second consultation due by 31 December and new rules, if any, expected by July 2022.

A key plank of its proposals is making sure firms provide information which consumers can understand and which helps them make informed decisions.

We are watching how this plays out very closely, and believe it could signal a step change within the advice sector and those who serve it.

Fellow lang cat Mike Barrett argues these two things – Brexit and a new Consumer Duty – could raise some big questions about what happens to costs and charges regulation in future. If the FCA is prepared to break away from EU rules on a bigger scale, could there be a case for ditching the MiFID II rules that aren't working (as looks to be the case for the 10% drop rule) and wrap disclosure rules in as part of the Consumer Duty instead?

This is a big question, and not one we can do justice to here. But it's definitely worth keeping an eye on.

The picture on MiFID II

As you are probably painfully aware, under MiFID II firms and advisers have to disclose all costs involved in investing in a fund or portfolio both as a forecast before investing (ex-ante) and actual costs incurred (ex-post).

MiFID II came into effect in January 2018. By 2019, advisers were reporting serious headaches with getting the right data from platforms, inconsistency of reporting and challenges with the cost information itself.

The FCA also weighed in, carrying out a review of costs and charges disclosure of 50 firms, from fund groups and D2C platforms to DFMs. It found that while firms knew what their obligations were, the rules were being interpreted differently, with problems on getting the required data out of third-parties, transactions costs and more.

At the time the FCA said it expected all firms to review their costs and charges disclosures to make sure they're meeting the rules, and that further action could include individual or firm-specific investigations.

Since then, advisers say they are generally comfortable with most of MiFID II, though they also say they don't always have the info they need to communicate the true cost of investing to clients.

It's worth making sure you have a robust process in place for disclosing costs, including as part of periodic suitability assessments. As we've seen, suitability, disclosure and value remain of interest, and may well be topics the FCA returns to.

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