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The UK financial watchdog has criticised investment firms for making almost all their disclosure documents too difficult to read and banned the “double-dipping” practice of charging fees and retaining interest on customers’ cash balances.
The moves are the latest push by the Financial Conduct Authority to make investment platforms, wealth managers and advisers improve how they treat retail customers by giving them clearer information and ending unfair charging practices.
The FCA also warned it “will take appropriate supervisory or regulatory action” if providers of older products in the £500bn unit-linked pension market fail to improve value for customers by reducing charges and improving returns.
As part of its proposals for simplifying disclosure rules, the FCA said it would ban investment companies from “double-dipping” by charging fees on customers’ cash balances while also retaining interest earned on the sums.
Last month, UK wealth manager Rathbones said it would stop charging fees on cash sitting in clients’ discretionary accounts after an internal review prompted by the FCA found “areas for improvement” that prompted it to stop taking on new clients.
The FCA told investment companies to stop “double-dipping” in 2023, when it sent a letter to chief executives, saying “we do not consider that it demonstrates that a firm is acting in good faith, that is honest, fair and open dealing, and acting consistently with the reasonable expectations of customers”.
Its letter said a review of a sample of 42 investment firms in 2023 had found 18 were “double-dipping”, warning this was not compatible with the consumer duty rules requiring companies to ensure customers have a good outcome.
On Thursday, the FCA said only 6 per cent of presale disclosure documents for investment products were “written in plain English”, after its review of 132 such documents found most were “written in jargon or legal language that many consumers struggle to understand”.
A further review, which included 40 extra documents, found all of 172 fell below the level of clarity required to be understood by secondary school students doing GCSE exams.
The watchdog said “word complexity was the main driver for the reduced intelligibility”, adding this was due to industry jargon, technical phrases, drafting choices and “a high number of complicated and challenging words”.
Investment companies would be given more freedom to decide how to present information to customers on their risks, past performance, costs and charges, the FCA said, as it laid out plans for replacing the existing rules that were largely inherited from the EU.
The new rules will replace the Mifid regulations on cost and fee disclosures for investment companies, as well as non-Mifid rules and the insurance distribution directive.
The reforms are designed to simplify requirements for UK investment firms, which the FCA said “can create duplication and operational complexity” with some companies having to maintain “parallel disclosure processes” for Mifid and non-Mifid products.
“Through these changes, we want consumers to be presented with clearer and more engaging information about costs and charges and interest on cash holdings,” the FCA said.
Jonathan Lipkin, director of policy, strategy and innovation at the Investment Association, welcomed the FCA’s move to simplify disclosure rules, saying: “Clear, comparable information on costs and charges is fundamental to consumer confidence.”
Aidan Campbell, a partner at law firm CMS, said the regulator was putting firms “on notice that they need to focus on making presale investment disclosure documents easier for customers to read”.
Additional reporting by Emma Dunkley
