Regulatory disclosure goes by different names in different firms.
Some firms refer to either their terms of business or their client engagement document, but for simplicity here we'll just call them 'disclosure documents'.
When it comes to good disclosure, there are some common themes to make sure your documents meet the FCA's disclosure requirements of being fair, clear and not misleading.
Your disclosure document should be provided to clients “in good time”.
This usually means very early on during the initial client engagement and always before any advice is given.
Conduct of Business Sourcebook (COBS) 6.1A.17R states:
- Firms must disclose their charging structure to a retail client in writing, in good time before making the personal recommendation (or providing related services)
- Typically, this is provided at the beginning of the initial meeting with the client or before the meeting
- It would be a problem if the firm did not provide its charging structure until the second meeting (when delivering its recommendation) as this does not allow the client to understand what they will pay early enough in the advice process
Tip: By sending your disclosure document to clients ahead of an initial meeting, it means the client has time to read and digest the document beforehand.
It also allows them to prepare any questions they might have.
In effect the disclosure document will have two dates on it: one showing the date it was issued to the client, the other showing when the client formally acknowledged receipt (for example, at the first meeting).
Purpose and charges
Disclosure is used to describe your firm’s proposition.
For example, if you offer independent advice there should be a brief explanation of what this means for the client, and what this means if you have a centralised investment proposition in place.
If you offer restricted advice, disclosure documents should explain whether your advice is restricted by the products you offer, the providers you use, or both.
Your document should include your typical or usual fee options. This is for both initial advice and any ongoing advice.
Where more than one fee payment option is available, each option should be explained to the client with examples provided in the disclosure document in cash terms.
The FCA also expects firm to take each fee option into consideration and recommend which payment option is most suitable for the client.
COBS 6.1A.19G states:
- If a firm has a percentage-based charging structure, they should provide examples in cash terms to illustrate how the charging structure will be applied in practice
- E.g. If a firm has a charging structure of 3 per cent of the value of investment, they should provide a generic example, such as: ‘For example, if you were to invest £100,000 our fee would be £3,000.’
- This guidance applies to both initial and ongoing adviser charges so there should also be illustrative cash examples for the ongoing service
Tips: We recommend that three examples are given for each fee structure.
For example: if a fixed fee is charged, an example of three different types of work where a fixed fee would apply and the fee that would be charged.
If a percentage of the initial investment is charged, show an example of three different investment amounts and the fee amounts.
COBS 6.1A.20G says:
- To assist clients in understanding the likely adviser charge, firms should specify if the hourly rates quoted are the actual hourly rates used by the firm, or whether they are indicative
- If the hourly rate is indicative, the charging structure should explain the basis on which the rates may vary
Firms using an hourly rate charging structure should provide an approximate estimate of the number of hours each service they offer is likely to take, in order for clients to understand the likely overall cost.
It's worth remembering the document is used to set out the 'typical' charges that apply (using typical examples of fees, percentage rate or hourly rates for typical work.
The actual charge a client will pay for the actual work to be carried out can be agreed later with the client using a fee agreement or what we call a client engagement letter.
Again, this will be agreed and evidenced “in good time” as detailed above.
We'd encourage firms to monitor where non-typical fees are being levied, and where the actual amount charged is higher or lower than the amounts shown in the disclosure document.
This is good management information for the business and will make sure your disclosure rates shown always remain up to date and in line with typical examples.
Try getting someone outside of financial services read your disclosure document.
Ask them to explain to you what they might pay for a £10,000 investment and what service they will receive.
If they can't explain it back, then you're unlikely to be meeting the 'fair, clear and not misleading' expectations.
Other important disclosure points
Your disclosure document will contain quite a lot of important information for the client, so always make sure your document is clear, fair, and not misleading.
This includes areas such as
Best execution: How the firm acts in the best interests of their client in terms of cost of advice, the speed, size, and nature of the business
Conflict of interest: Explain the policy or policies you have in place, and let the client know they can have a copy of this on request
Compensation arrangements: Include contact details for the Financial Services Compensation Scheme as well as up to date example rates of compensation.
Firms must also disclose to clients the right to cancel an ongoing service, as required by COBS.
Describe to the client the process they should follow if they wish to cancel either the initial advice or ongoing advice fees.
This should be made clear to the client - we recommend this is repeated within any fee agreement or client engagement letter.
The explanation on cancelling the initial advice should be clearly shown immediately below the details on initial fees, and the same goes for cancelling the ongoing advice.
This may seem obvious, but often cancellation terms are hidden away in the small print at the back of the document.
Some terms to avoid
There are certain terms and phrases that really should be avoided within your disclosure document.
These terms are unlikely to meet the clear, fair and not misleading requirement.
It's worth avoiding phrases such as:
"We reserve the right to charge a fee."
"Additional charges may apply."
"Our ongoing fee for transactional work will be..."
"Each year we will undertake a review of your financial objectives."
"You may terminate our services only by writing."
"Our fees range between £1,000 and £10,000."
"Please sign to confirm your understanding."
Based on these examples, good practice would be as follows:
"Typical examples of our fees are explained as followed..."
"We will agree with you all the charges you will incur before any costs become due."
It's also worth bearing in mind that firms may only apply ongoing charges where they have agreed to deliver ongoing service and advice. An ongoing charge shouldn't be applied to transactional advice.
Firms should describe what a review service includes and confirm the periodic assessment that advice is suitable.
Terminating services only in writing fails to meet treating customers fairly outcome six (post-sale barriers). This requires that the client should be able to terminate the advice in a number of ways, including by phone for example.
The firm should provide specific examples for each method used to calculate client charges.
We believe the FCA would see signing to confirm understanding as unfair. Instead, the client should be invited to sign the document to confirm receipt, not to state they have understood it.
Once you're satisfied your document meets the required standard, your compliance officer will usually approve the final document.
Keep this within perhaps the financial promotions register or as part your usual records, and diarise to review it again in six months.
Tip: Make sure there aren't older versions lurking around or showing on your website.
You'll also need to train all staff who use the disclosure document. Keep this evidence at a firm-level, and staff may also record this training as part of their continuing professional development records.