Posted: 27th February 2017
First published by New Model Adviser on the 23rd of February 2017
In Q2 2016, the FCA began their work to review a sample of over 1,000 advice files to determine the typical standard of advice being provided to consumers.
Advisers and advice firms will be keenly awaiting the findings of the review, which is expected to land imminently. However, advice has been on the regulator’s agenda for a number of years now, and so the review will touch down in the midst of this ongoing industry debate.
Given the issues we are observing across the sector and what we know already about the advice discussion from a regulatory point of view, it’s possible to discern some of the likely outcomes of the review and provide firms some early food for thought.
A key area of advisers’ focus is delivering recommendations that represent value for money. This is an important factor in ensuring customers ultimately receive fair outcomes. An example of where firms sometimes fall short in this area is placing clients on platforms where there is no tangible client benefit. No matter how much functionality a platform has, if the client is not using its functions then the platform will not offer value for money.
As well as this, whether any potential conflicts of interest exist in a firm’s business model – and how this might impact on customer outcomes – should be considered. For example, vertically integrated models offer potential benefits for both consumers and firms, but there are conflicts inherent in the model. Firms have to ensure that conflicts are clearly disclosed and managed appropriately.
Other areas of focus will likely include ensuring recommendations are consistent with the client’s risk profile and that, for replacement business, firms can demonstrate that the new product is more suitable for the client than the ceding one.
It is likely that the FCA will comment on the ‘know your customer’ (KYC) information firms hold on file, including clients’ circumstances and objectives. Without this information it is difficult for firms to ensure that they are giving suitable advice.
The report may also cover disclosure of charges. Here it is important that files clearly demonstrate that the client is aware of the total cost of ownership (i.e. product, fund, platform and adviser charges).
Another focus area could be the standard of research on file in relation to recommended product and funds. The results of the review will shed more light on whether any issues in this area are widespread.
The control environment
The suitability of advice is dependent on the robustness of the related operating model. Inadequate processes to help ensure suitable advice is given (including processes for obtaining sufficient customer information) can contribute significantly to poor outcomes.
Firms should ensure they can evidence their processes for obtaining client information. With regards to the standard of advice this information results in; firms should consider the benefits of periodic ‘quality of advice’ reviews, which will help them gain assurance that their processes are leading to suitable recommendations for its clients.
It is also important to consider outcomes testing and root cause analysis on advice outcomes. The lessons learned from this can be used to inform an ongoing view of performance and identify areas where processes can be improved.
To this end, staying up-to-date on market and regulatory developments will also help your firm maintain a contemporary view and allow you to react proportionately to changes in best practice.
Pre-empting the Advice review results
Firms are close to getting the FCA’s latest take on advice; however, it is unlikely that the review will result in many assertions not already being discussed across the industry. That said, the findings will certainly provide clarity on where the FCA believes firms need to improve in the immediate term.
With this in mind, firms can – to some extent – pre-empt what is to come and begin to think about their approaches in the above areas. Perhaps the most important activity for firms is to review their existing methods to help ensure customers receive suitable advice.