23rd January 2009

Compliance Tip - January 2009 - Quality of Advice Processes

This compliance tip is applicable to all retail intermediaries giving advice together with most other advising investment firms.

Whilst Treating Customers Fairly “TCF” was a major theme for FSA in 2008 and will continue to be so in future, 2009 looks set to see the regulator focus on the Quality of Advice Processes “QAP”. This follows a second review by the FSA and other recent publications issued by them.

The FSA’s main QAP findings from the reviews showed that most firms were making progress putting appropriate advice processes in place, but a significant number still had more to do in some key areas. The FSA identified several key areas for improvement and commented that: 

Management Information and SYSC

• Whilst the vast majority of firms gathered relevant management information about their businesses, more of them must ensure that they actively analyse and use that information to review their processes – and consider it as evidence to demonstrate whether they are treating their customers fairly.
• Firms must work harder overall to demonstrate adequate systems and controls to monitor their advice process; many firms need to adequately consider findings and demonstrate action taken as a result of file reviews as part of their management information.
• In some cases, file checking appeared to only concentrate on the completeness of the file rather than reviewing the quality of the documentation evidencing the information gathered from, and provided to, customers. In other cases, where issues were picked up, they were not followed up by remedial actions or training plans being put in place.

Assessment of customer needs

Firms must do more work to demonstrate that they have gathered sufficient know your customer (factfind) information when assessing customer needs; the main weaknesses were found in:

• identifying and recording customers' needs and objectives;
• establishing and recording customers' attitude to risk; and
• exploring all areas of financial needs when giving full advice.

Communication

Suitability letters continue to be the main area of concern. They must meet the clear, fair and not misleading requirements. In the reviews FSA found, in a number of cases:

• there was no explanation of the reasons for switching products / funds;
• letters were insufficiently personalised and contained jargon; and
• the risks and charges associated with the recommendation were not explained.
• firms that provide "focused advice" to customers must also make their customers adequately aware of the implications and risks of receiving such advice.

Payment options

It remains a concern that a number of the firms mystery shopped did not offer customers a genuine option to pay by fee only and in some cases, customers were dissuaded from paying by fee.

This FSA QAP approach has been further amplified by the very recent letter issued to firms regarding ‘pension switching’. Following this thematic work FSA concluded that advice was unsuitable in 16% of the switch cases reviewed and went on to provide example reasons why this was the case. The letter also requires firms to assess “the advice your firm provides to customers to switch their pensions, in order to ensure that your firm has treated customers fairly in the past and continues to do so, and that it is giving suitable advice in line with our rules and guidance.”  Further follow-up work is then promised for later in 2009…..

Key Action Point

FSA’s stated approach is one of support for those firms who are making progress towards ensuring that appropriate advice processes are in place; however this is being combined with tough supervisory – or even enforcement – action for those who are not.

All firms’ New Year resolutions should include ensuring that they are fully aware of and where relevant act upon the content of the wider QAP findings which are all available on the FSA website. These include summary reports and five factsheets with some further examples of good and poor practice.

Help

Any firms requiring a review of their existing procedures or further immediate guidance on this issue should contacttheir usual Consultant.

Resources Compliance provides business quality review services to a number of clients and would be happy to discuss these further with interested firms.

More information

Visit www.compliance.co.uk

Contact

Resources Compliance,
Phil Robson
Quantum House, 32 Mellor Road, Cheadle Hulme, Cheadle, Cheshire, SK8 5AU
Tel: 0161 486 1000, Email: phil.robson@resources-uk.com.