10.3 Disclosure Requirements and Adviser Charging

Initial Disclosure

Before a firm provides any advice, COBS 6 requires it to give the client initial disclosure — a clear written explanation of the basis on which it will do business. The minimum content covers:

• Services — the nature of the service offered (independent or restricted; one-off or ongoing).
• Regulator — the firm's regulator (typically the FCA) and its Financial Services Register number.
• Complaints — the firm's internal complaints procedure and the client's right to refer to the Financial Ombudsman Service (FOS).
• Status — whether the firm is independent or restricted, and the nature of any restriction.

Disclosure must be clear, fair and not misleading and must be provided in good time before the client is bound by any contract. For retail clients, the disclosure is often provided in a single 'initial disclosure document' or within the client agreement.

Why Status Disclosure Matters

A client choosing an adviser needs to know whether the recommendation will be independent (whole-of-market) or restricted (limited range). A restricted adviser cannot offer the entire market, and the client must understand that limitation before relying on the recommendation. Failing to disclose status accurately is one of the most common FOS complaint themes.

Financial Promotions under COBS 4

COBS 4 governs financial promotions — any invitation or inducement to engage in investment activity. The core rule is that a promotion must be clear, fair and not misleading. COBS 4 also requires that:

1. The promotion is identifiable as such — the client must know it is a promotion.
2. The person making the promotion is clearly identified.
3. The promotion is approved by an authorised person (for non-authorised communicators).
4. Risk warnings are presented in a way that is clear, prominent and comprehensible.

Promotions include website content, social media posts, advertisements, direct mail, telephone calls and seminars. Real-time promotions are subject to additional rules, and promotions to retail clients about non-mainstream pooled investments carry stricter requirements.

The Financial Promotion Approval Regime

Under section 21 of the Financial Services and Markets Act 2000 (FSMA), an unauthorised person cannot communicate a financial promotion unless it is approved by an authorised person. The approver must take responsibility for the promotion complying with COBS 4. Breach is a criminal offence, punishable by up to two years' imprisonment on indictment.

RDR and the End of Commission

The Retail Distribution Review (RDR), which took effect on 31 December 2012, fundamentally changed how retail investment advice is paid for in the UK. The key reforms were:

• Abolition of commission on retail investment products — providers can no longer pay commission to advisers for recommending their products.
• Adviser charging — advisers must agree a charge directly with the client, paid either as a fee, deducted from the product, or facilitated by the product provider.
• Higher qualifications — advisers advising on retail investment products must hold a qualification at Level 4 of the Qualifications and Credit Framework (QCF).
• Clear status disclosure — the independent/restricted labels were formalised.

The RDR was designed to remove the bias created by commission and to make the cost of advice transparent to the client.

Three Layers of Charge

A retail client investing through an advised product typically pays three layers of charge:

Each layer must be disclosed to the client in cash terms where it is known, or as a percentage where it is not. The combined effect of these charges over the life of the product must be illustrated in the suitability report.

Initial and Ongoing Adviser Charges

COBS 6.1A distinguishes:

• Initial adviser charge — a one-off charge for the initial advice and recommendation. It can be paid as a fee, or facilitated by the product provider from the product itself (for example, by deduction from the investment amount).
• Ongoing adviser charge — a recurring charge for a continuing service, typically a percentage of funds under management. It must be supported by an ongoing service — the firm cannot charge an ongoing fee without providing an ongoing service.

Where the ongoing charge is expressed as a percentage, the disclosure must explain that the adviser charge may increase as the funds grow. The firm must also confirm how the client can cancel the ongoing service and cease payments.

Pricing Disclosure under COBS 6.1A.26

COBS 6.1A.26 requires the disclosure of total adviser charges to be fair, clear and not misleading. In practice, this means the disclosure must:

1. Explain what service is being provided for what adviser charge.
2. Explain when the charge is due.
3. Tell the client if the total adviser charge varies significantly from the firm's standard charging structure.
4. Where the ongoing charge is a percentage of funds, make clear that the charge may increase as the funds grow.
5. Confirm the details of any ongoing service, the associated charge and how the client can cancel.

Practical Example

A client invests £100,000 in a Stocks and Shares ISA on the advice of an independent firm. The firm's charging structure is an initial adviser charge of 2% (£2,000), an ongoing adviser charge of 0.5% per annum, a platform fee of 0.25% per annum and a fund charge of 0.75% per annum. The suitability report must disclose each layer in cash terms and explain that the 0.5% ongoing adviser charge is for an annual review service, which the client can cancel at any time.

The CeMAP candidate should be able to identify each layer, explain why transparency matters, and recognise that the failure to disclose any of these charges is a breach of COBS 6.1A.26.