If you read the industry press regularly you could be forgiven for thinking that the provision of financial advice is an ever moving set of goalposts, with new and constantly changing rules, guidance and regulations which firms need to be acutely aware of, but is this really the case?
The majority of firms we deal with are retailers of one fundamental product. Advice. So, if there’s just one product to deal with, you’d probably figure that it’s important to get that bit right wouldn’t you? Why then is the one thing that firms provide for their clients so problematic?
OK, this might be over simplifying things to a degree, but the fundamental principle applies, and everything that advice firms do is really geared towards the provision of advice to clients.
Well, yes that is true, after all, financial services is a regulated industry, but when it all boils down, financial resilience is all about the firm being able to stand on its own two feet - RegData returns provide empirical evidence of this. Systems and controls are the path on which firms run and provide MI to tell those running the firm what’s going on and what they may need to consider if the data flags up issues.
T&C evidences that those providing the advice are competent to do so. And file checks evidence that the advice they provide, be that initial or ongoing, is suitable or not. More often than not, evidencing suitability is where many of the issues lie within firms.
A quick glance at the findings within thematic reviews, past business reviews, Section 166 Skilled Person reviews and FCA final notices will tell them same story over and over again. The firm in question was contacted by the regulator, data was requested, interviews were conducted and files were checked and it’s more often than not the findings of the file reviews that set the wheels in motion.
It’s usually a case that a sample of X number of files was selected and from these X% were suitable, X% were unclear and X% were unsuitable, quite often with a pretty even split between the three, but when it comes to unclear and unsuitable cases there is usually one overriding issue - weak, inadequate, inaccurate or out of date KYC.
Without adequate KYC, firms simply cannot evidence that their advice is suitable. We’ve cited the rules in COBS 9.2 so many times before it’s probably easier to look them up yourself, but they’ve been pretty much unchanged since they came into effect in November 2007, so the goalposts in this regard really haven’t moved at all.
When the feedback lands there’s the usual angst and pushback, with advisers indignant that their advice is suitable, that the client is completely happy and that the case reviewer is either nit-picking or has no idea what it’s like because they’re either not qualified or they’ve never sat in front of a client. Yet some of the worst files we see are prepared by those holding Chartered status!
What this really boils down to is fact finding – evidencing that you know your client. We regularly meet advisers who’ll say “I’ve known this client 25 years”, but their files look like they’ve known them 25 minutes, with little beyond rudimentary hard facts, a list of policies extracted from the back office system and some tick box generic objectives, often numbered 1-5, with all but one being low priority and one being what the adviser is going to make recommendations on.
Then there will be a risk profiling questionnaire, some illustrations, fund fact sheets (often just those that relate to the firm’s CIP) and then a massive suitability report containing a litany of risk warnings and some generic objectives like the client wanting “growth above inflation over the medium to long term”, or “the client wants to review their pensions” (a euphemism for switch everything into our preferred solution), or whatever, but more often than not, almost nothing in the client’s own words.
We frequently see fact finds with partner’s details absent, income sources not clarified and scant regard paid to outgoings, but with many firms heavily reliant on cashflow forecasting how can you do this without full details of what the client spends?
File notes often provide little beyond the features of the solution being recommended, with supporting commentary such as: “the client is looking for discretionary fund management”, or “the client wants an investment where the fund manager actively makes day to day decisions on their behalf”, or even, “the client is looking for a smoothed return”. Yeah right.
For decumulation cases we regularly see “the client wants maximum flexibility”. What on Earth does that mean? Or, “the clients want to spend more in the early years of retirement and reduce spending later in life”. How much? For how long? On what? And when? This detail is all too often either absent, or in the adviser’s head, both of which get you nowhere when it comes to proving suitability. And just because a client is ‘happy’ doesn’t mean that the advice they received was appropriate. How many clients were happy that they got the result they wanted when they asked the firm to transfer their DB pension? And how many received poor advice?
We do see some really excellent files of course and good advisers ask great questions, and write down exactly what the client’s responses were. They clearly articulate what their clients wanted to achieve, their concerns, the drivers behind them seeking advice and their views and opinions, but far too many cases contain little of this.
Any of this look familiar?
If you want to stop receiving unclear or unsuitable file grades and avoid war breaking out when you receive the feedback, get the basics right and you may be pleasantly surprised.
Our View
We still see a high percentage of cases where the KYC on file simply isn’t adequate or sufficient to form a basis for advice. Goodness knows how paraplanners can put together coherent reports when all they get is a scribbled, incomprehensible fact find with basic instructions to do this or that. Is that a chorus of ‘dead rights’ we hear from our paraplanner readers?
Despite the rules being in place for over 16 years, so many files still exhibit weak or inadequate KYC. This more often than not translates into lengthy suitability reports, because the adviser feels that they need to throw the kitchen sink at the case to be able to defend themselves if a complaint lands. Generally speaking, complaints rarely arise when clients receive suitable advice, but firms slavishly think that the report is their salvation, when the reality is that a good fact find with well written supporting notes containing the client’s own words will provide a far more secure get out of jail card.
We’ve revisited KYC with several firms in the last six months or so and whilst they might not necessarily agree with everything we suggest, there’s been a tangible upturn in file quality since.
Getting the basics right is often overlooked, but get them wrong and it’s like building your house on sand.
Paul Jay - Senior Compliance Consultant
If you’re still reliant on an old fact find perhaps it’s time for a refresh and if the feedback you receive keeps telling you what you don’t want to hear then doing the same thing isn’t likely to change that.
Weak KYC is probably the easiest route to regulatory issues and an inability to evidence suitability of advice just leaves firms unnecessarily vulnerable. With the FCA continuing to focus on firms that they haven’t previously had contact with it’s only a matter of time before the walls come tumbling down for some, but it is possible to avoid much of this by proving that you have the basics covered.
We can help with informal, honest and common sense KYC refresher training and with updates and redesigns of fact finds and KYC gathering mechanisms. Just let us know what support you need.
Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 020 7436 0630 or sending an email to info@thistleinitiatives.co.uk.