Investment Advice Process - Regulatory Procedures

Question 1

What are the potential issues or risks?

HINT: 4 things.

Answer 1

• Client detriment
• Increased complaints
• Regulatory focus
• Impact on our firm commercially

Question 2

Initial Disclosure (Full List/Details)

Answer 2

It is important that every client, or potential client, understands the basis on which your firm intends to do business with them, and that this is clear to them from outset. You should therefore provide appropriate information before you start to provide services, in a comprehensible form to a client or potential client about:

• Your firm’s name and contact details.
• Whether your firm offers independent or restricted services (or both).
• The methods of communication used with clients and the languages that may be used.
• Confirmation that that your firm is an appointed representative of the Network which is authorised by the FCA and contact details.
• Details of any reports that will be provided relating to the performance of services provided e.g. suitability reports and periodic assessments of suitability.
• Costs and associated charges of providing your services.
• Details of any risks that may be relevant to the client.
• Complaints and compensation arrangements.
• Details of your conflicts of interest policy.

The disclosure must be issued in a ‘durable medium’ which in practice means either in hard copy written format or sent via email (but this must not be able to be amended i.e. the document should be in a pdf format or similar).

Every client (or potential client), both retail and professional must be given these documents before any kind of regulatory service is provided. In most cases, this will be provided at a first meeting with a client, along with the adviser’s business card, and will be accompanied by a brief verbal overview of the document.

The Network requires that you use an appropriate client agreement or similar client disclosure document to cover all of the relevant disclosures.

When any changes are made to the disclosure document then the new version needs to be provided to the client either on next contact or via a centralised mailing.

The date of issue to the client of the disclosure document(s) should be recorded on your iO client file and signed copies uploaded.

Question 3

Disclosing whether you provide independent or restricted advice

Answer 3

In relation to the scope of the advisory services you provide, your disclosure documents should cover:

• Whether this is independent or restricted advice (or both). This should include a brief description of why your advice qualifies as being independent or restricted, along with the nature of any restrictions that apply.
• Where your firm offers both independent and restricted advice, the scope of each service should be clear, so that clients can understand the differences.
• A description of the types and range of investments that may be recommended, along with (if relevant) your firm’s relationship with providers of those investments. You should also describe the analysis of the investments and providers and the factors considered, such as risks, costs and complexity.

For independent advice:

• Where the range of investments includes those provided by your firm, or by firms connected in any way to your firm, you should clearly distinguish between the range of investments provided in this way, and those provided by unconnected firms.
• You must confirm that your firm is prohibited from receiving or retaining inducements.

Question 4

Disclosing the services you provide and your charging structure - Investment services

Answer 4

Your disclosure documents should confirm details of the services you provide and the costs for providing them (adviser charging).

Question 5

Disclosing adviser charging

Answer 5

The key disclosure requirements relating to adviser charging are that you must:

• Provide your client with details of your generic charging structure at the outset.
• Provide your client with their specific charges, in good time before making a personal recommendation. As a result of this information, they should understand how much they will need to pay. The actual costs must be in cash terms or converted into cash examples. The documentation should also be clear on the point at which charges begin to accrue and how these will be paid.

Question 6

How to make your initial disclosure information clear?

Answer 6

• It’s good practice to try and provide details of your services and charges before the first meeting. This will allow your clients time to read the details in advance, so they have a better understanding of what your firm can provide.
• Charges should be expressed clearly and in cash terms wherever possible.
• If any minimum fees apply to your services, make sure these are stated clearly, in cash terms along with details of when they might apply.
• Your disclosure should cover charges for both initial services and any ongoing services (if provided). You may also have separate charging arrangements for ad hoc services.
• For ongoing services, it’s important that these are valid and defined services. Vague services, such as being available to take calls, are unlikely to be considered appropriate. You must also indicate when the costs for ongoing services will start, for example, when the initial advice is given, after six months or a year later.
• You must make clients aware that they have the right to cancel ongoing services at any time, by giving reasonable notice. They must be able to cancel without penalty and without giving a reason. This doesn’t prevent you recouping costs for services that have already been delivered, but this should be made clear in your disclosure documents.
• Clearly highlight that the client will get a personalised quote before they are liable for any charges.

Your disclosure documents should not only make it clear that your clients have the right to cancel ongoing services, but also that your firm has a similar right to cancel the provision of ongoing services as well. Where this is the case, the FCA expects clients to be given time to locate another adviser.

Question 7

Disclosing the remuneration you receive for life policies

Answer 7

Where you also undertake insurance distribution business in relation to life policies, in addition to the above, you should also cover the following additional points before the conclusion of the insurance product and if necessary, on its amendment:

• The nature of the remuneration received in relation to the insurance product i.e. the type of remuneration your firm will receive e.g. fee, commission, bonus or other financial incentive.

Question 8

Disclosing your charges

Answer 8

Once a client agrees to take up your services, you must provide details of the actual charges that they’ll pay, in cash terms, as soon as practicable.

Question 9

Aggregated information on costs and charges

Answer 9

As part of your disclosure to clients (or potential clients) you must provide an aggregated overview of costs and charges of your services and any recommended solutions. This must be provided in advance i.e. before the investment service is provided (referred to as ex-ante disclosure) and again on at least an annual basis (referred to as on an ex-post basis).

This requirement applies to all investment business (including life policies) with the exception of pensions business although the detail of the application to life policies is slightly different.

The Network’s requirement is that the ex-ante disclosure is made at the point of sale in the suitability report. In practice this will mean that all suitability reports are produced pre-sale.

The suitability report templates reflect this timing and include a section on aggregated costs and charges.

Question 10

Purpose of suitability assessments

Answer 10

Your disclosure documents must inform clients that the reason for undertaking a suitability assessment is to enable the firm to act in the best interests of the client.

Question 11

Reliability of information

Answer 11

To enable an appropriate suitability assessment to be undertaken, clients must be made aware of the importance of providing correct, up-to date and complete information.

Question 12

Periodic suitability assessments

Answer 12

Clients must be informed whether they will be provided with a ‘periodic assessment of suitability’. This disclosure must include information on:

• the frequency and extent of the assessment and what will trigger it.
• the extent to which the previously collected information will be reassessed.
• How any updated recommendation will be communicated to the client.

Question 13

Recording communications

Answer 13

If telephone communications or conversations between your firm and its clients will be recorded, clients must be made aware of this before any investment services are provided.

Question 14

Conflicts of interest policy

Answer 14

When providing clients or potential clients with information about the firm and its services, a summary description of the firms’ conflicts of interest policy and that further details can be provided upon request, must be included.

Question 15

Providing aggregated costs & charges disclosure for investment services

Answer 15

Unless stated otherwise, references to investment services relates to MiFID investments and Insurance Based Investment Products (IBIPs).

The Insurance Distribution Directive (IDD) extended the requirement to disclose aggregated costs and charges information to insurance-based investments products (IBIPs). The IDD requirements are largely similar to the requirements under MiFID for other investment products. As such, our guidance on aggregated costs and charges for investment services also applies to the distribution of IBIPs. However, there are some slight differences, where applicable these are noted below.

Where you provide investment services to clients, you must provide:

• an aggregated overview of all costs and charges of your services and any recommended solutions.
• an illustration showing the cumulative effect of costs on return.

This information must be provided in advance (ex-ante) and ongoing on at least an annual basis (ex-post) for clients who receive ongoing reviews.

Illustrating the cumulative effect of costs on return shouldn’t be seen as a separate disclosure, but a continuation of the aggregated costs and charges disclosure.

The obligation to provide aggregated costs and charges disclosure is in addition to other disclosure requirements referred to under disclosure requirements for investment services.

Question 16

Presenting the aggregated costs and charges disclosure

Answer 16

There’s no specified format for disclosing the aggregated information, however, it can be provided in a standardised format.

If you’re using a platform, the platform provider may provide a ‘charges summary document’ (or similar). These are designed to meet the platform provider’s regulatory obligations and will focus on fund management, other product charges and adviser charges (if facilitated). They tend to provide the information you’ll require to make your own aggregated costs and charges disclosures. You may issue this type of document to your client as it typically provides a breakdown of the costs for all investments held on that platform. However, you will still need to fulfil your own obligations and aggregate these costs and charges and disclose these to the client. If the client has investments held off platform and/or on another platform, these will also need to be taken into account when making your disclosure.

Question 17

Disclosing aggregated costs and charges - Investment services

Answer 17

Your disclosure of aggregated costs and charges needs to be provided:

• in advance i.e. before the investment service is provided (also referred to as ex-ante disclosure) and
• where relevant, at least annually (also referred to as on an ex-post basis) during the life of the investment.

Your disclosure should include a breakdown and total of:

• Costs incurred for your service, such as, fixed fees or percentage of funds under advice.
• Costs that will be incurred depending on the type of investments and amounts invested.
• Costs of any third-party services, such as a platform or using a discretionary management firm (DIM).

For example, where you recommend another firm’s products or services to your clients (e.g. a platform or a third party discretionary management firm (DIM)), you’ll need to aggregate the costs and charges for your own services with the charges for products or services provided by the other firm.

In addition, where any payments are received by your firm from a third party in relation to the investment service provided to a client, these payments are regarded as part of the overall cost of the service being provided to the client. Any such payments received should be disclosed separately. This is so that it is clear to a client, which part of the costs paid are rebated back to your firm in relation to the provision of the investment service.

You must also provide your client with an itemised breakdown of the costs and charges referred to in this section if requested. You should inform clients of their right to request such information when providing them with details of your aggregated costs and charges disclosure.

Personal Pensions do not currently fall under MiFID II or IDD requirements to provide aggregate costs and charges disclosure as they are not categorised as either a MiFID financial instrument or an IBIP. In the interests of providing clients with consistent costs and charges information the Network requirement is that where possible, all pension and investment products should be treated on the same basis.

Question 18

Which costs and charges must be aggregated?

Answer 18

The costs and charges that must be aggregated are those relating to relevant services and investments. They must be totalled and expressed both as a cash amount and as a percentage.

All costs and charges should include VAT where appropriate.

Question 19

What are Service Costs?

Answer 19

Service costs are the costs and charges levied by your firm or by other parties to whom the client has been directed.

Question 20

What are Investment Costs?

Answer 20

Investment costs are the costs and charges associated with the manufacturing and managing of the relevant investments.

Question 21

Where do you get the aggregated costs and charges information to be disclosed from? - PLATFORM

Answer 21

If you’re using a platform, it may provide a ‘Charges summary document’ (or similar document) that provides all the information you will require for your aggregated costs and charges disclosure and to illustrate the cumulative effects of costs on return.

For example, it will provide the relevant initial and ongoing costs and charges for the platform, adviser charges and funds. This information should be used to compile the aggregated costs and charges to be included in your suitability report.

Question 22

Where do you get the aggregated costs and charges information to be disclosed from? - NON-PLATFORM

Answer 22

If you’re not using a platform, in order to compile your aggregated cost and charges disclosure within the Suitability Report, you’ll need to obtain them from the provider.

• Your disclosure must include all costs for the investment and any ancillary services you are providing together with all costs associated with the manufacturing and managing of the relevant investments.
• You need to make sure that the relevant investment product transaction costs are included within your disclosure - failing to do so, will result in the aggregated figures being incorrect.
• If the relevant KID or KIID doesn’t provide the investment product transaction costs, you can’t just leave this cost out of your aggregated costs and charges disclosure. You should contact the relevant provider and if this cost is still not available, you are expected to apply a ‘best endeavours’ approach.
• When disclosing costs and charges, these must be provided in both cash and percentage terms.

Question 23

Providing advance (ex-ante) aggregated disclosure - Investment services

Answer 23

You must disclose to your clients aggregated information about all expected costs and charges of your service and any recommended solutions, including subsequent recommendations to existing clients. This must be provided to your client in good time before you provide investment services.

The information in relation to costs and charges should be included within your suitability report and given in advance of, or at the beginning of the advice meeting. This means your disclosure should cover actual costs and charges for the recommended solutions. In practice this will mean suitability reports will be required to be prepared prior to the presentation meeting with a client.

Question 24

Regular premiums in the aggregated costs and charges disclosure

Answer 24

To cover regular premiums in the aggregated costs and charges disclosure, providers are looking at the premiums on an annualised basis e.g. £100 per month equates to £1,200 in the first year, with the charges being disclosed from there. This appears to be a sensible approach and fits with the requirement to provide a client with aggregated disclosures on at least an annual basis. So, for an initial / up front disclosure for regular premiums, the disclosure would be based on the first year’s annualised premium and charges.

Question 25

Disclosure of aggregated costs and charges when advising couples where investments may be in single or joint names

Answer 25

This depends on how the couple want to be dealt with in terms of your services. Where they want to be advised as a couple e.g. a client agreement is signed by both, a joint fact find is completed and the relevant suitability report is addressed to them both etc. then this type of disclosure can be made on a joint basis. This may cover investments that are hold in individual names e.g. ISAs.

However, where a couple wants to be dealt with as individuals on their own i.e. receiving advice on their own investments, then the disclosure will need to be provided on an individual basis.

Question 26

Adviser charges direct from the client i.e. not facilitated by the platform or provider

Answer 26

These will need to be taken into account in the disclosure of aggregated costs and charges and their effect on return. This is on the basis that your adviser charges form part of the total aggregated costs and charges that need to be disclosed.

Client paid fees do not need to be taken into account when illustrating the cumulative effect of charges on return. This is on the basis that as your adviser charges are not being deducted from the actual investment there won’t be any effect on the return.

Question 27

Illustrating the cumulative effect of charges on investment returns

Answer 27

In addition to disclosing aggregate costs and charges, you must provide clients with an illustration of the cumulative effect of the costs on the return of their investment.

This needs to be done as part of both your advance and ongoing disclosure of aggregated costs and charges.

Question 28

Providing ongoing (ex-post) disclosure - Investment services

Answer 28

Where you have agreed an ongoing relationship with your client, such as ongoing advisory services, you must ensure that once a year, the client receives details of the total costs and charges they actually incurred in the previous year.

You can issue the ongoing aggregated disclosure to clients at any time, provided it’s issued at least annually. However, the appropriate timing for this disclosure is as part of your agreed review process, for example, as part of an annual review. This allows you to discuss the costs as part of the review and ensures the client understands them.

Where you have provided a purely one-off service, such as advice on a particular transaction, you’re not required to provide ongoing information about aggregated costs and charges.

Providing aggregated costs and charges information where you can’t obtain all of the information needed

Some platform / product providers are currently not in a position to provide the information you require in order to provide your (first) ongoing disclosure. If you can’t obtain all the information from the relevant platform / provider to enable you to make your ongoing disclosure, you should apply a ‘best endeavours’ approach.

Question 29

Providing disclosure on fund switches and top-ups - Investment services

Answer 29

Where an existing client invests additional funds (tops up) into the same investment or another investment of the same type (e.g. investing more money into the same or another unit trust), you are required to provide a new disclosure of aggregated costs and charges.

You should also ensure that the client has received all relevant information in relation to the additional investment e.g. details of product charges that differ from those disclosed previously. These should be covered in the relevant product disclosure document e.g. the KID / KIID.

For fund switches, including switches conducted in relation to a centralised investment proposition, where there is no fundamental change in structure of the fund(s) i.e. no material change such as a like for like fund replacement or a rebalance/switch within a model portfolio, then new disclosure of aggregated costs and charges should not be necessary. If you are not sure whether the fund switch might be considered to be fundamental, then you should make the ex-ante disclosures as detailed previously.

Question 30

Do the aggregated costs and charges disclosure requirements apply to pre-RDR business, where commission is still being received and annual reviews are taking place?

Answer 30

Yes. As there is an ongoing relationship, all relevant business should be included in the aggregated disclosure. Whilst there’s no adviser charge and commission is being received, the commission is still an ongoing charge which should be included in the disclosure.

Question 31

Do the aggregated costs and charges disclosure requirements only apply when providing investment services to retail clients?

Answer 31

No. These requirements also apply when providing investment services to professional clients.

Question 32

Do we have to disclose ongoing aggregated costs and charges when a client ends our business relationship?

Answer 32

Yes. You’re obliged to disclose ongoing aggregated costs and charges on an annual basis, if there is or has been an ongoing relationship with a client during the year. When a relationship ends with a client, as part of the process of closing the client’s file, you should provide details of the actual costs and charges they’ve incurred since your previous disclosure. This would be your final disclosure to that client.

Question 33

How does the ongoing aggregated disclosure need to be issued?

Answer 33

The ongoing disclosure of aggregated costs and charges is best done as part of your client’s review (assuming this is at least annually). This will allow you to discuss the costs as part of the review and ensure the client understands them.

You can issue your disclosure at any time, provided it’s issued at least annually. It’s therefore possible to issue this to clients separately, for example, as a bulk mailing to all clients in early January for the year ending 31 December. However, you’ll need to carefully consider the impact of this. For example, in terms of resources, ensuring all clients are provided with the disclosure as required, as well as whether your clients would prefer and better understand the disclosure if provided as part of their agreed review (assuming this is at least annually).

Question 34

Do we still need to disclose ongoing costs even though this information is being sent out to clients by platform providers?

Answer 34

Yes. Firms have their own obligations to disclose ongoing costs and charges to their clients.

Where a communication is being sent to the client from the platform it may not necessarily include all relevant costs and charges that a firm is obliged to aggregate (for example, investments held off platform).

Question 35

Does a platform provider’s document meet a firm’s obligation to disclose ongoing aggregated costs and charges?

Answer 35

The platform provider’s charges summary document is designed to meet the platform provider’s regulatory obligations. A firm has its own obligations to disclose aggregated ongoing costs and charges to its clients. However, the information being provided by platform providers should greatly assist you in making this disclosure.

The information required for you to meet your own ongoing disclosure obligation is being provided and you will only need to aggregate the information contained in the charges summary (obviously, if a client has investments held on another platform and/or investments held off platform these would also need to be added) and provide the aggregated costs and charges to your client.

Question 36

The platform we use, produces a summary letter of the relevant costs and charges (Charges summary document). Can we give this to our client instead of compiling our own aggregated disclosure?

Answer 36

Yes, as long as the document in question provides aggregated costs and charges in relation to the investments on that platform. However, the ones seen provide a separate summary for the different types of investments and don’t aggregate these.

If you refer to a particular document, you should make sure that you clearly sign-post where the relevant information is located within the document, so that the client knows exactly where to find it.

Question 37

If we charge an adviser fee that relates to investment and protection advice, how do we deal with this in our aggregated costs and charges disclosure and illustrating the cumulative effect of charges on return?

Answer 37

Any costs associated with providing advice must be transparent to the client to ensure they’re fully aware of what they’re paying for. Therefore, any costs associated with providing investment and protection advice should be clearly separated.

For example, if you charge a total of £500, the amount linked to providing your investment advice should be clear. It’s only the amount being charged for providing investment services that’s subject to aggregated costs and charges disclosure and the cumulative effect on return requirements.

Question 38

If we receive adviser charges direct from a client, so they’re not facilitated by the platform, will we need to take this into account in the disclosure of aggregated costs and charges and their cumulative effect on return?

Answer 38

Yes. In relation to calculating the aggregated costs and charges. This is because, your adviser charges form part of the total aggregated costs and charge that need to be disclosed.

No. In relation to illustrating the cumulative effect of charges on return. This is because your adviser charges aren’t being deducted from the actual investment, and as such, they won’t have any effect on the return.

Question 39

What if we can’t get the relevant data from a provider / platform?

Answer 39

Where you’re struggling to get the relevant data from a particular provider / platform, you should assess whether you can provide your clients with adequate information on the total costs and charges for the relevant investment service(s) and investment(s).

Provided you’re confident in being able to make a reasonable and sufficiently accurate estimate of the total costs of the investments involved, you’ll be able to use this estimate to calculate the total aggregated costs and charges. The rationale used to arrive at any estimates should be held on the relevant client file.

However, we now understand that the majority of platforms and providers are now in the position to provide the relevant data you need to fulfil your obligation to disclose aggregated costs and charges.

Question 40

What charges need to be included in the aggregated information on costs and charges?

Answer 40

The aggregated information must include all costs and charges of the investment services being provided and any recommended solutions, with the amounts being totalled and expressed both as a cash amount and as a percentage.

Where relevant, the investment services would need to include your services; the services of a platform; and/or the services of a firm offering discretionary management services.

Question 41

Do we need to provide the aggregated information on costs and charges for all investment business?

Answer 41

You’ll need to provide this disclosure for pretty much all investment business that you’re involved in, as it relates to MiFID investments and insurance-based investment products.

Question 42

Categorising investment clients

Answer 42

When dealing with clients it’s important to consider the type of client that they are. There are different regulatory categories of client depending on whether you are providing investment, protection or mortgage services and these can dictate how different regulations may apply. Additional considerations apply when providing services to clients who are based overseas, who act as trustees or who are employers looking for advice on group pensions or protection.

To make sure you are categorising investment clients correctly, you need to:

• Establish the category of each client before conducting investment business with them, i.e. a Retail Client, a Professional Client, or an Eligible Counterparty.
• Check that each of your firm’s regulatory permissions allows you to deal with the correct client categories.
• Make and retain a record of how you’ve categorised each client, including appropriate information to support this and that the client has been made aware.

Regulatory protection is greatest for a retail client. It’s anticipated that this is the category into which most clients will fall into.

Question 43

Notifying investment clients of their categorisation

Answer 43

Prior to providing any services to a new client (or an existing client that you have newly categorised), you are required to notify them, in a durable medium, of the following:

• Their categorisation as a retail client, a professional client or an eligible counterparty; and
• Their right to request a different categorisation and any limitations to the level of client protection that a different categorisation would provide.

This is typically included within your client agreement.