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In our previous article covering the FCA’s thematic review of retirement income advice (TR24/1) we looked at what the findings told us at a high level. This time we’ve focused a little more on some of the specifics and perhaps, an area that many firms fail to consider.

The industry press has been littered with articles about the regulator contacting five of the biggest providers of advice to obtain details of their ongoing reviews and one in particular that has made eye watering financial provisions for having not delivering what was promised, but TR24/1 also contained some interesting findings.

The FCA’s survey revealed that 231 firms indicated that 6,108 out of 213,128 customers (2.9%) had paid for but did not receive an annual/ongoing review in 2022. Overall, less than 3% isn’t too bad really is it, but that’s just one year in isolation, so perhaps that doesn’t provide a truly representative picture. Maybe the reasons behind the reviews not taking place provides more insight and perhaps, some knock-on effects?

Why were reviews late or not completed?

According to section 2.27 of the review, ‘Some firms were unable to provide the number of missed reviews but proceeded to indicate why reviews had been missed. The key reasons were (more than one option might apply for each firm):

• 382 firms indicated customers declined/did not respond
• 29 firms attributed this to firm error/oversight
• 10 firms indicated this was due to employee resource
• 157 firms noted that data was either not measured or not recorded centrally.

Now that’s a bit more informative. There were 977 firms surveyed, so nearly 40% had clients who declined a review or didn’t respond, which begs the question, why did they decline a review? Maybe, because the client didn’t feel that they needed one, in which case why did the firm sign them up for an ongoing service in the first place?

In a speech last year FCA director Therese Chambers questioned why up to 90% of clients need an annual MOT. According to 382 firms in the survey, some of their clients don’t!

Default solution

Even before RDR, firms were moving away from high initial commissions and moving to a recurring income model based on trial commission, but after 2012, when adviser charging entered the equation, this lit the afterburners and ongoing advice charges became the norm in many firms and whether an ongoing review service was needed by the client or not, this is what they were signed up for. We frequently see files where clients have been recommended to invest £20k into an ISA and have been signed up to the ongoing review service. Does the client need this and, importantly, can the firm profitably deliver a periodic suitability assessment for 200 quid?

Commerciality? 

Signing clients up to the firm’s ongoing review service effectively compels the firm to deliver what was promised, and in January 2018, with the implementation of MiFID II, this became a regulatory requirement for many contracts, yet despite many of these arrangements generated at times very modest revenues (see above), few firms have looked no further than turnover and fewer still considered whether the service they had promised could be delivered profitably.

So, how many firms/advisers are working several months of the year effectively for nothing? Or even at a loss? And how many firms know what it costs to profitably deliver the service that all these clients have signed up for? If time/cost equates to £1000 and OAC generates £500 pa, then you don’t need to be a genius to work out the sums here.

Amazingly, this is something we come across very frequently, with firms seemingly blissfully unaware that the relationship they have with some clients actually costs them money. Some just cannot bite the bullet and turn off any form of revenue, no matter how insignificant, even when the cost of providing the service costs more than they generate.

Time for a rethink?

The compulsion to deliver a service that’s been promised (and formalised via a client agreement) remains, regardless of how much OAC this generates, so when clients decline the service and firms can’t generate a profit from some of their client base, does it make sense to continue taking the OAC? So why not consider turning some of this off and providing clients with a review when they want one, for a fee commensurate with the work required and agreed upon at that point?

There are sprat to catch a mackerel scenarios of course, but does it make any sense at all to provide services at a loss? Go figure.

By Paul Jay, Senior Compliance Consultant

Our View

Firms that continue to take OAC but fail to provide the service they’ve agreed are on a slippery slope from a regulatory viewpoint, but firms that continue to deliver services at a loss are maybe not long for this world.

Consumer Duty has certainly got firms thinking about their propositions and some have changed their charging structures as a result, but many are still unwilling to consider turning off any revenue source, no matter how modest it may be. Turnover is vanity and profit is sanity as they say, but how many firms know what it costs them to generate £1 in profit?

If clients are declining reviews then they’re sending a clear message that the service the adviser so enthusiastically recommended isn’t what the client wants, needs or values and there are words in the dictionary that describe the scenario when someone takes the money and doesn’t deliver the service.

Don’t forget that if a client doesn’t respond or declines a review meeting the firm must still perform a periodic suitability assessment, issue a suitability report (based on the latest available KYC) and perform ex-post costs and charges disclosure within 12 months of the previous one. The rules within COBS 9A state that the PSA must be performed at least every 12 months and more frequently for higher-risk customers. How many firms think just one is OK? Or even manage just one, as highlighted within the review!

One large firm can provide 426 million reasons why this is a problem and anyone who thinks that they’re the only firm with that issue is kidding themselves.

And if this wasn’t enough to consider, wait until the ramifications of CP23/24 – Capital deduction for redress – come into effect. Maybe it’s no longer a case of survival of the fittest, but more those who are best able to adapt. Doing nothing isn’t an option for many firms.

Action required by you

If you haven’t properly looked at your client bank/target market and worked out what it costs to deliver your services profitably, right now is probably a good time and if you can’t get all the reviews you’ve agreed to do done then something has to change.

If you need some help contact us, because if firms don’t get this right it’s one of the easiest ways of not only incurring the wrath of the FCA, but also a soft target for claims management companies. Get it wrong and it could get expensive.