Media reports indicate that the Financial Conduct Authority (FCA) has turned its attention to the recruitment procedures, and the procedures for monitoring advice quality, used by advisory firms.
It is understood that information was collected from 40 firms, and that this information is now being analysed by the regulator. The FCA consulted with the Financial Ombudsman Service and Financial Services Compensation Scheme when deciding which firms to approach, suggesting that the exercise at least partially targeted firms whose complaints activity was giving cause for concern.
The FCA’s response to a Freedom of Information request reads:
“We can confirm as part of our ongoing supervision we have contacted a number of financial advice firms to gain a better understanding of their procedures when recruiting advisers and the systems and controls they have in place to monitor and oversee the quality of their advice.
“We identified the firms the FCA would write to through analysis of information and data we would normally rely on for the supervision of firms. This includes, but is not limited to, complaints data, FOS awards and FSCS claims.”
All firms should have procedures in place for monitoring the suitability of the advice given, and also for monitoring the quality of the supporting documentation. To do this, firms to keep records of all communications with customers, such as a fact-find document for a face-to-face sale. If the sale has been conducted via telephone, it is highly desirable to record the conversations.
File reviews should be carried out on a sample of client files. The proportion reviewed for each adviser should reflect both their competence and the risk of the product concerned. For new staff, or those who are still to demonstrate sufficient levels of competence, it may be desirable to review all of their cases.
File reviews are a fundamental part of any compliance monitoring programme. If advisers are recommending products that are unsuitable, this could mean that the firm receives complaints from disgruntled clients, or that the FCA takes action and imposes a fine and/or instructs the firm to pay compensation to clients who were mis-sold.
File review considerations might include:
• Is the product suitable for the client given their personal circumstances, needs and objectives?
• Ensuring the client can afford the recommended products is also very important. This means that the client must be able to afford the payments both now and given any changes in personal circumstances the firm could reasonably foresee, e.g. childbirth, impending unemployment, retirement.
• Does the fact-find or similar document contain enough information about the client and their needs and objectives to be able to advise them properly?
• Does the file evidence why a particular provider and product was chosen?
• Does the suitability report or similar issued to the client after the financial review fully explain why any recommendations have been made, and does it fully explain the product’s key features and risks?
• Were the correct disclosure documents (e.g. client agreement, personal illustration) provided?
• Was the customer’s identity satisfactorily verified?
These checks might be made by the adviser’s supervisor, or by an internal compliance officer. If the firm does not have sufficient resources and/or expertise to carry out such checks, it is recommended that this is outsourced to an external consultant.
Where a file review identifies deficiencies, the firm should rectify these, perhaps by issuing revised documentation to the client, or by amending discrepancies in the fact-find.
For face-to-face sales, it can also be beneficial to conduct observed calls, where the supervisor sits in on the client interview and checks that correct procedures are being followed.
Effective recruitment procedures should ensure that new advisers have the skills, qualifications and experience required for their role. This may require the firm to carry out credit checks and criminal records checks; obtain references; and ensure that all required certifications and permissions are obtained
Once recruited, advisers need to be trained on company procedures. The firm needs to consider how they are supervised, the initial levels of monitoring they are subject to, the standards for being declared competent, and the requirements for ongoing personal development.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article