10th April 2008

Compliance Tip - Not that old chestnut again!… Factfinding

Firms can use a wide range of methods to obtain and record factfind information about their client’s circumstances and needs and whilst the most common approach is to use a standardised factfind document, firms also use meeting file notes, voice recording systems and agenda updates to record the position. However, whilst all of these methods can potentially be used to record and document the information necessary to justify the suitability of a recommendation, the work carried out by both the FSA and ourselves demonstrates that this is frequently not the case.

The ongoing thematic work that the FSA is undertaking in relation to “Investment Quality of Advice”, as well thematic work on the quality of Mortgage and Insurance advice and Treating Customers Fairly, have all confirmed that the assessment of customer needs and objectives and the documentation of this position remains a “key area for improvement”.

At Resources Compliance we also continue to see firms who would on the face of it have adequate systems in place to record customer information, however the actual records that are made in this area are frequently insufficiently detailed to support the recommendation made. This is especially the case where firms have long standing relationships with clients as in this situation there tends to be a lack of up to date information on file, making it difficult to justify advice provided more recently. Based on the reviews we have undertaken, we are, if anything, coming around to the view that all firms need to think again about adopting a much more structured approach to this area!

We all know that the FSA is committed to a principles based approach to regulation and that although the rules relating to factfinding are contained within one quite short concise handbook rule, material elsewhere on the FSA website, together with that in other publications issued to firms, continues to stress that firms are failing to obtain sufficient customer details to justify recommendations and provides guidance on what the expectations are. Therefore in order to adapt to the more principle-based world all firms need to take the initiative and make improvements where necessary to their factfinding processes and records, and those which do not, or have inadequate records, are likely to be subjected to prescriptive requirements, additional monitoring or even enforcement action if they are reviewed by the FSA.

One further point to add in regard to this “old chestnut” is that there was a key change to the factfinding rule in COBS. This now requires investment advisers to obtain information regarding the client’s “knowledge and experience” in investment types equivalent or similar to those being recommended. Any firm using a standardised factfind that has not been recently updated should therefore consider whether this needs to be reviewed and all firms will need to ensure that their advisers are made aware of this requirement and that file review processes are amended accordingly.