An FMA review of fee disclosure recommends where appropriate, advisers should proactively discuss fees, commissions and incentives with clients “…rather than relying solely on the client reading the written disclosure, particularly where remuneration arrangements are complex or may reasonably influence a client’s decision-making.”
The FMA’s other practical recommendations, specifically for Financial Advice Providers, in the review are:
- Ensure Fee Disclosure clearly explains any fees that may arise in the event the financial advice product is closed early, or the client does not proceed with the advice. “This should include how any clawbacks or fees apply and how they are calculated.”
- Disclose commissions as a dollar figure. “While commissions can be disclosed as either a percentage or dollar figure, we consider disclosure in dollar terms to be good practice to assist with investors readily understanding what the adviser will get out of the advice process.”
- Ensure Fee Disclosure is provided in accordance with the legislative requirements, including providing prescribed information at the appropriate advice stages “for example when the nature and scope of advice becomes known, and when the advice is given.”
The FMA review looked how fees, incentives and commissions are disclosed across 37 managed investment schemes, a range of discretionary investment management services and selected financial advice providers. It assessed disclosure against the Financial Markets Conduct Regulations 2014 and its own guidance.
The authority says in a statement that while disclosure [across the three sectors] was generally satisfactory, the review found some issues with clarity, completeness and consistency while also highlighting good practice, including clear upfront fee summaries and simple explanations of tiered fees.
The FMA’s Executive Director for Response and Enforcement, Louise Unger says clear disclosure lets people see the overall cost of a product or service, compare their options, and decide whether something suits them. The review looked at whether investor-facing disclosure lets people do that.
Most problems the FMA found were minor, but they contributed to making costs harder to understand…
“Most problems the FMA found were minor, but they contributed to making costs harder to understand,” says Unger. “Fee information was sometimes spread across several documents without clear signposting. In some instances, different documents used different words for the same charge. Some disclosure explained what a fee was called but did not clearly explain how it worked or how it affected returns.”
She says that most providers are doing a reasonable job, and where the FMA saw weaknesses “…they were about clarity and consistency, not anything hidden. Managing conflicts from the way financial service providers are paid is one of our priorities this year, and clear fee disclosure is part of that.
“In short, providers should explain material fees in plain language, say when payments apply, and keep the information consistent across every document,” says Unger.
We also identified weaknesses in record keeping … and instances where fees, incentives and commissions were not disclosed proactively or at the appropriate time…
The report itself includes a standalone section on FAPs and the FMA says it found that many FAPs reviewed provided Fee Disclosure that satisfactorily described the fees, incentives and commissions associated with their advice services.
“However, in some cases Fee Disclosure lacked sufficient clarity, completeness or consistency, or was provided in a less user-friendly or comprehensible manner.
“We also identified weaknesses in record keeping for substantiating fees charged, and instances where fees, incentives and commissions were not disclosed proactively or at the appropriate time,” the report adds.
It says where issues were identified, it provided feedback to the relevant FAPs, setting out its findings and recommendations, and sought to understand the actions they intended to take to address the matters identified.
The FMA intends to undertake targeted follow-up reviews to assess how identified issues have been addressed.
Click here to see the full report.
