Chapter 7: The regulatory advice process Flashcards
7.1: Regulators and the approach to consumers
TOTAL NUMBER OF QUESTIONS 13/100
MULTIPLE RESPONSE 8/13
In this section, we explore the regulated advice standards and the obligations these rules place on firms.
Let’s start by considering what financial advice is, and why governments want to encourage access to advice.
In Jan 2007 Otto Thorsen carried out a review, examining the feasibility of delivering a national approach to generic financial advice.
Thoresen stated in the introduction to his report, that there was: “a gap in the provision of impartial information and guidance on money matters”.
The report concluded that, generally, the aim should be to ensure greater access to high-quality, affordable financial advice for those most vulnerable to the consequences of poor financial decision-making.
This opened several discussions and initiatives around improving financial advice provision for consumers
7.1.2: National Strategy for Financial Capability
The FSA introduced the National Strategy for Financial Capability, which has been continued by the current conduct regulator, the FCA.
The FSA approached the Financial Skills Council, now known as Financial Skills, to work with financial services employers and stakeholders to develop standards known as the National Occupational Standards.
It aims to develop performance capabilities that meet a national standard for people who are providing generic financial advice. The National Occupational Standards define the remit for generic advice.
The FSA had an initial five-year programme, which involved liaising with a variety of organisations including:
- Schools, further education colleges, and training programmes
- Employers and employees in the workplace
- Non-profit organisations
The aim of this initiative was to ensure all consumers had access to generic financial advice, so they would be better placed to make informed decisions. As mentioned, this initiative is now led by the FCA.
Following the review by Otto Thoresen, an impartial and ‘sales-free’ Money Guidance Service was established, providing information and guidance on budgeting, saving and borrowing, amongst other things.
The FCA leads the National Strategy for Financial Capability which works to improve the financial capability
of people in the UK. This involves the education of children in schools.
The Money Guidance Service has developed further over the years. It has changed names a few times too!
Money Guidance Service ↓ Money Made Clear ↓ Money Advice Service
Its aim, throughout these name changes, remains the same: to empower all consumers by improving their generic financial knowledge, thereby making them better-placed to make sound financial decisions (with our
help of course!). It does not, however, give advice, despite its name…
7.1.3: The Money Advice Service (MAS)
The Money Advice Service (MAS) was launched by the Consumer Financial Education Body on 4th April 2011.
It is a nationwide service, aiming to provide clear information about financial products to the masses.
Under remit of the FCA and is free and impartial
KEYFACT
Remember, the MAS is a government initiative lead by the FCA, under its principle of ‘good regulation’.
What other help does the government provide for consumers?
In 2015, the Taxation Of Pensions Act came into force (TOPA 2014) - ‘Freedom in choice and pensions’. These changes gave consumers greater choice in how they use their pension monies at retirement.he government provide for?
Introduction of a single financial guidance body
The government plans to introduce a Single Financial Guidance Body later in 2018/19. The aim is to merge TPAS, Pension Wise and the MAS and to provide a more streamlined service.
7.1.4: Treating Customers Fairly
Treating customers fairly (TCF) has been around for some time now. Firms must demonstrate that they are consistently treating their customers fairly. The FCA specifically asks firms how they have embedded this standard throughout their businesses as it needs to be evident at all levels within firms. Firms must look at their business, identify relevant outcomes, and embed them to ensure customers are treated fairly.
There are 6 TCF outcomes that firms must achieve:
• Consumers can be confident… fair treatment of customers is central
• Products and services… meet needs of identified consumer groups
• Clear information provided before, during and after sale
• Advice is suitable and takes account of the consumer’s circumstances
• Product performance and the service provided are as expected
• Consumers do not face un-reasonable post sale barriers… on claims, switches and complaints.
(these are abbreviated here for ease of understanding and remembering)
All firms must ensure that their advisers or representatives do not provide any advice outside of their scope or product range, nor mislead the public to think that they can. This contravenes the COBS.
There can be no product bias in advisers’ remuneration policy that may lead them to recommend one
product over another, for their own benefit.
Vulnerable clients
The FCA website states
“A vulnerable consumer is someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.”
The FCA has stated that firms can, and should, adapt their processes to make sure the needs of this group of. customers are taken account of.
7.1.5: The Retail Distribution Review (RDR)
The Retail Distribution Review (RDR) came into force on 1st January 2013, and was one of the biggest changes the financial advice industry had seen.
RDR had several different aspects to it, ranging from a new minimum level of qualification to distinguishing
between sales and advice. It also altered adviser charging and remuneration packages
Main points:
Professional Standards
• All financial advisers need to acquire QCF level 4 (e.g. Diploma in Financial Planning) status if they wish to give life, investment, or pensions advice.
• Previously this was QCF level 3 (e.g.Certificate in Financial Planning).
• This has raised the minimum qualification standard, with the aim of giving the financial services industry a more professional standing.
Adviser charging / remuneration structure:
• Adviser remuneration is now in the form of an advice fee, rather than commission paid by product providers.
• This was to remove any bias in the advice process.
• The charges are set up-front, and are dependent upon the service provided by the adviser.
Sales versus Advice:
- Advisers who offer ‘independent’ advice are required to offer unbiased, unrestricted advice which is not influenced by providers.
- Firms that do not offer this will provide either ‘sales advice’ (i.e. non-independent advice) or no advice, called execution-only.
There are now therefore two types of financial advice that consumers can choose between:
• Independent
Based on a comprehensive analysis of the client’s situation and the market in terms of suitable products and providers.
This is offered by whole of market advisers/ IFAs.
• Restricted
Also based on a comprehensive analysis of the client’s situation, but the choice of both product and provider is limited.
This is offered by both single and multi-tied advisers.
7.1.6: The Sandler Review
The aims of the Sandler Review were simple. Stakeholder products needed to:
• be straightforward and easy to understand
• be as flexible as possible
• have a low charging structure
• control the level of risk that consumers are subject to
Stakeholder products are ‘lighter touch’ or basic-advice products, designed to simplify access to arrangements such as ISAs, pensions, and life products, Full disclosure is not required, know your client rules are replaced with a series of questions known as decision trees, and a suitability report has been replaced by a less comprehensive recommendation summary. Recommendations must be suitable, not the most suitable’, and there is less red-tape all round.
7.1.7: Financial Advice Market Review (FAMR)
There is concern that many people are making far reaching financial decisions without advice.
The Financial Advice Market Review (FAMR) report was published in March 2016, by the Treasury and the FCA.
This report made recommendations for the following:
• The Government
• The Financial Conduct Authority
• Employers, service providers and consumer groups
A progress report was published by the FCA and the Treasury in April 2017. There will be another review of
FAMR outcomes in 2019. Quoting directly from the progress report, the main points are…
“… 28 recommendations intended to tackle the barriers to consumers accessing advice and foster a market with the following characteristics:
• Good availability of affordable, high quality advice and guidance, which supports consumers at all stages of their lives.
• Greater innovation in the interests of consumers, encouraged by a flexible and well understood regulatory framework for advice.
• A range of channels through which consumers are able to access advice and guidance, including in the workplace, and appropriate flexibility in the way consumers are able to pay for advice.
• Consumers that are engaged with their own financial affairs and so seeking out the advice and guidance they need.
The Financial Advice Working Group (FAWG) has recommended the following actions, to date:
Actioning recommendations:
‘Financial Well-being in the Workplace: A Way Forward’ (Recommendation 12)
‘Consumer explanations of “advice” and “guidance” (Recommendation 17)
‘Rules of Thumb and Nudges: Improving the financial well-being of UK consumers’ (Recommendation 18)
Seeking clarification on recommendations:
Non-advised services (Recommendation 3)
Streamlined advice (Recommendation 4)
Fact-find process (Recommendation 10)
Employer and trustee factsheet (Recommendation 11)
7.1.7: Financial Advice Market Review (FAMR) CONT…
The 3 areas of recommendation, and some examples of the recommendations are:
Affordability
• the FCA should set up a dedicated team to help firms that are developing mass-market, automated-advice models bring them to market more quickly.
• clarifying the legal and regulatory environment to help firms develop
streamlined advice or guidance services
Accessibility
• tackling barriers which prevent consumers from seeking advice
•The FAWG has created a guide for employers to support their employees’ financial well-being, available in 2017.
•a set of principles for nudges to prompt people to improve their financial well-being
• Pensions Advice Allowance: £500, three times, from a pension pot to pay for retirement advice
• a £500 tax exemption for employer- arranged pensions advice from April 2017.
Liabilities and consumer redress
• advisers have expressed concern that ‘future liability is preventing them from giving advice today.
• make it clearer how the Financial Ombudsman Service (FOS) deals with consumer complaints
• clarify funding of the Financial Services Compensation Scheme (FSCS)
There is no doubt that the financial services industry will see further changes implemented as a result of the Financial Advice Market Review
Regulators and the approach to consumers SUMMARY
- The National Strategy for Financial Capability is a government and FCA initiative
- The Money Advice Service offers generic consumer information and is under the FCA
- Pension Wise is a website educating consumers about new pension choices from 2015 onwards
- Treating Customers Fairly relates to Principle 6 of the FCA Principles for Business
- Individuals, firms, and markets must demonstrate that customers are being treated fairly
- The Retail Distribution Review introduced new standards to the UK financial services industry
- These included higher, level 4, minimum qualification levels, the introduction of advice fees rather than commission, plus two new categories of advice: restricted and independent
- The Sandler Review bought in a range of simple, low cost products aimed at those on low incomes, including short, medium, and long-term products. Charges are capped, minimum premiums are low and affordable, and there is a default investment fund for the long-term pension product
- The advice process is simpler with suitable product recommendations - basic advice
7.2: Adviser and client relationships
Advisers are obliged to operate within the FCA’s COBS rules when establishing and maintaining relationships
with their clients, and have a duty of care to them at all times.
How that duty of care is expressed does, however, depend on the category of client.
We will start this section by going back to the different adviser types so that you have a good understanding of what these are, and what that means to the client in terms of their advice.
As mentioned earlier, following the RDR, there are two types of advice:
Independent and Restricted
Within these definitions, there are three types of financial adviser:
Single-tied or Multi-tied or Independent/WOM
For your R01 exam you must understand these different categories and what they mean in terms of the advice a client will be receiving.
Again, you will need to be able to apply this knowledge to exam questions.
7.2.1: Types of adviser
You may have come across terms such as polarisation and de-polarisation.
In 1988, the UK Government introduced the polarisation regime, which meant advisers had to either be tied to a single insurer or product-provider or, be an independent practitioner.
De-polarisation opened up a third route for advisers; that of being multi-tied, so offering products from a range of providers.
Under de-polarisation, advisers can now be:
Single-tied agents
• Often found in banks and building societies as an AR
• Advise on the products of one provider
Multi-tied agents
• Quite common nowadays
• Advise on the products of various companies
Whole of Market advisers
• Whole market access
• Often referred to as IFAS
• Can recommend any company’s products
COBS rules are similar for all three types. All advisers must act with the same skill and diligence as each other, but there are a few definition differences to consider:
Single-tied agents
• The representative’s duty is to select the most appropriate product or service from the range at
their disposal
• If no such product exists, they must advise the client they have no suitable products
Multi-tied agents
• Can advise on the products of a range of companies that they are tied to
• The representative’s duty is to select the most appropriate product or service from the range at their disposal
• They must select a product provider from the range of
companies at their disposal
• If no such product exists, they must advise the client they have nothing suitable
Whole of market advisers
• Can select from the whole market and, as such, are
expected to be more aware of the industry
• They are obliged to recommend the best product and the best provider for their client
• Price, financial strength, investment performance
and service all need to be considered when choosing
providers
7.2.2: Types of client
Clients are categorised into groups for investment business.
Retail clients
‘Elective’ Professional clients
‘Per Se’ Professional clients
Eligible Counterparties (‘Elective’ and ‘Per Se’)
There are always exam questions on this area.
Client Type + Key Points:
Retail
• The most common type of client
• Offered the highest level of disclosure and protection by the regulator
• If the client is not classified as Professional or Eligible Counterparty, then they are automatically classed as a Retail Client
• Some firms classify all their clients this way for simplicity, and to avoid any mistakes being made
• A retail client could be classified as professional, subject to the financial adviser establishing client credentials (doing some checks!)
‘Elective’ Professional
• This is a client who is deemed ‘professional, not due to their nature but due to their knowledge, experience and expertise
• Further analysis will be required to ensure that the individual is as knowledgeable as suspected
• This could be
- Qualitative i.e. assessing the client’s feelings, experience and knowledge, or
- Quantitative if the firm is subject to MiFID. This involves
assessing previous transaction history/investment values held
• An industry expert, e.g. another Financial Adviser, could be classified as an ‘elective professional client’
‘Per Se’ Professional
- These are clients who are deemed ‘professional, simply due to the nature of their role, business model or organisation
- No further analysis is required with a per se client, as the adviser is satisfied they have a greater awareness than a retail client
- They include Governments, local authorities, high street banks and other
- FCA authorised firms (not generally individuals)
Eligible Counterparties (Elective and Per Se)
• Clients can be Eligible Counterparties for certain business types
• The business (service) being provided to the client can be either:
- Dealing on their own account, such as the firm selling blocks of shares directly to clients, or
- Arranging, executing or transacting for ‘orders’, such as
carrying out deals at the request of clients
• So, simpler business types
• Generally, advisers will not classify into this sector, it will be decided by the firm (not generally individuals)
• This category receives the lowest level of disclosure and protection
• The same rules apply for ‘per se’ and ‘elective categories of eligible counterparties as we covered above under professional clients
This assessment should be carried out each time a client wishes to transact business with an adviser.
ICOBS rules are slightly different. They classify clients as:
• Consumers: Real people (so not a corporation) who are not in the trade’ of the business being transacted
• Commercial customers: Anyone who is not deemed to be a consumer
• Customers: This is the collective term used when referring to both Consumers and Commercial Customers
MCOB classifies everyone as customers.
7.2.3: Types of business
There are several different types of business that can be transacted with a financial adviser. These include:
Execution-only
• An investor knows exactly what they want
• They do not seek nor receive any advice
• The adviser merely completes the transaction on behalf of the client
• Money laundering checks must still be completed
Best-execution
• This applies mainly to direct stocks and shares advice (as opposed to life, pensions and collective investment schemes)
• A duty of care exists to ensure that the best possible price is obtained for the client
• This means seeking the lowest price for a buyer and highest price for a seller
• Deals must be completed in a timely fashion
Limited advice
• Advice is still provided but only in specific areas of financial planning
• A client may ask an adviser to only look at their mortgage needs and not protection
• The FOS do not like this approach
• These arrangements should be documented, and the disadvantages explained to the client
Non-advised
• No personal recommendation is made
• Sufficient information is provided to the client
to enable them to make an informed choice as to the suitability of the product
• Generic advantages and disadvantages can be
Note: We have already mentioned execution-only cases and the removal of the need for certain aspects of
disclosure. These should not be confused with best execution cases.
Insistent Clients
An adviser may come across an individual who is an ‘insistent client’. This is where they insist on a different course of action from the one recommended by the financial adviser in the original suitability report.
If this occurs, a second letter should be issued, reiterating the original advice. Only then, if the client still
insists, should the business be completed. Many firms will not accept insistent client business, as they view it as high-risk and going against Principle 1: Integrity. This is their choice.
Signed documentation (detailing the fact that their actions are against the advice of the firm) must be obtained from the client who is requesting that the adviser arrange the transaction.
Limitations and referrals
There will be some areas of advice where a firm or adviser may not have full knowledge and skill. It is
important that they understand the extent of their authority and expertise and seek further assistance if
necessary.
FCA Principle 2 requires firms to conduct their business with ‘due skill, care and diligence and the COBS rules
provide further guidance.
Firms can rely on information passed to them by clients, unless it is obvious the data is inaccurate. However,
if they perceive they have too little information, then they should not make a personal recommendation.
Look at the next chapter activity and see what you can remember about the different types of service a
financial adviser can give to a client.
7.2.4: Fiduciary duties
So, what is fiduciary duty?
A fiduciary is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person.- WIKI
Fiduciary duty describes the highest standard of care.
The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the
beneficiary. The highest standard of care, and the duties it involves, are commonly expressed in terms of things that financial advisers must NOT do, such as:
• The firm cannot receive any inducements from product providers
The firm’s relationship with product providers is that of agent for the client, not the product provider. One implication of this is that;
• They must also avoid conflicts of interest
Such as helping one client buy an asset whilst helping another client sell the same asset. Occasionally, they may encounter conflicts of interest e.g. dealing with both parties to a divorce. In these cases, a disclosure of interest should be made in writing to both clients outlining the adviser’s relationship with each party.
• They cannot have contracts with clients that exclude or restrict any duty of liability E.g. they could not write to a client saying… ‘we agreed you did not need a suitability letter…
• Firms must not claim to be independent when they are not
• They cannot charge to handle complaints against themselves
• They cannot offer inducements
Adviser and client relationships SUMMARY
- There are two types of advice: independent and restricted
- Advisers are grouped into single-tied, multi-tied and independent, following de-polarisation
- Single-tied and multi-tied advisers must recommend the most suitable product from the range at their disposal
- Independent advisers must recommend the best product and the best provider
- There are three client categories: retail, professional, and eligible counterparty
- Retail clients get the highest regulator protection, and eligible counterparty the lowest
- There are various types of business, including: execution-only, best execution, limited advice, non- advised and insistent customers
- Execution-only means no advice has been sought or given
- Best-execution relates to stocks and share sales and purchases (not collective investments)
- Fiduciary duties mean the highest standard of care must be given by a financial adviser to a client
7.3: The advice process
The advice process is broken down into various component parts. They can be summarised as:
First or fact find meeting ↓ Second or presentation meeting ↓ Post advice ↓ Reviews and monitoring
We will consider each of these, starting with the first meeting between an adviser and their client; often
known as the fact find meeting.
We will look at what each stage entails and covers, both from an adviser and client perspective, considering
what each party’s responsibilities are.
7.3.1: Initial fact find meeting
This first meeting covers some key areas, including:
• Initial adviser status and services disclosure
• Fact-finding: where the adviser must satisfy the regulator principle of ‘know your client
• Customer Due Diligence: required as soon as the adviser feels they will be in a business relationship with
the client for non-simplified transactions
Disclosing information about a firm and its services
There are strict rules that cover how a firm discloses its status, services and how it is paid. These are contained within the COBS section of the block 1 high level standards contained within the FCA handbook.
All types of financial adviser must disclose to the client:
• Their status
• The services and advice they offer
• How they are paid (generically at this stage)
Fact Find CONT1.. The paperwork used for initial disclosure has evolved over the years... Terms of Business ↓ Client Agreement ↓ Initial Disclosure Document plus Menu ↓ Services & Costs Disclosure Document
What is covered in this initial disclosure?
Rules are laid down covering the first communication with a client. They apply regardless of the method of contact; in person, by telephone, or in writing.
All initial communications should follow a clear path:
Status Disclosure
• EXPLAIN to the client…
• firm’s regulatory status “authorised by the FCA…”
• Advice offered (independent or restricted)
• Service Provided
• Complaints procedure
• Details of the FSCS
Charges
• EXPLAIN to the client…
• How advice is paid for
•The amount of any other income due to the business
•Any remuneration payable to the firm, its agents, or employees
Client Agreement
• ISSUE to the client…
• A Client Agreement (or Terms of Business, IDD and Menu or SCDD), either before business is conducted or immediately after, if via remote means such as telephone/online
•The exception is where the transaction is a direct offer financial promotion (advert in a paper/magazine) or life office selling as a principal.
•The object of this document is to ensure that clients know exactly what sort of firm they are dealing with, the services provided and the likely costs involved.
The only exceptions are:
• non-advice ‘execution-only’ cases, where the initial contact is via telephone (some text must be read out and then documents must be posted to the customer after the call) or
• where they have been provided previously.
What about if business is done online?
This type of business still requires a form of initial disclosure to be completed.
E-Commerce Directive rules exist regarding online advertising. This is clearly a growing market.
These must show:
• The name, address and email contact of the firm offering these services
• Their FCA status, plus their registration number
• The services offered and how to place an order
Orders must be acknowledged, but this does not mean they are accepted.
KEYFACT
COBS rules apply equally to online companies as for other authorised individuals, firms, and
markets carrying out regulated activities.
Remember, at this stage of the advice process the adviser knows very little about the client, so the charges
disclosed are generic and not client-specific. This happens later in the process.
For remuneration of employees and agents, a firm must put a value on any benefit or services provided.
Records of client agreements must be kept for the longer of:
• 5 years
• The duration of the client relationship
• Indefinitely for pension transfers, opt outs, and FSAVCs
Fact Find CONT2..
KEYFACT
Completing a fact find satisfies the regulator principle of ‘know your client’.
Know your client
You cannot make a recommendation to a client without
taking into account relevant information.
What areas are covered in a fact find?
- Personal details, such as tax position
- Family
- Employment history
- Income and outgoings
- Assets and liabilities
- Any policy details including life assurance, savings, and investment plans
- Client objectives, rated in order of importance
- Client’s attitude to risk, established via a profiler
What happens if the client will not disclose everything to the adviser?
The adviser has a couple of options:
• If they feel they have sufficient client information, they can continue with the advice process, but must document the client’s behaviour
• If they feel they do not, they can terminate the process at this point
If the client is unwilling to disclose full information to their adviser, it suggests a lack of trust. This does not bode well, as the aim is that the adviser and client have a good working relationship!
What else does the adviser need to establish from the fact find information?
They need to establish a budget, and discuss and document affordability with the client.
One of the areas completed on a fact find is in relation to income and outgoings. This should naturally lead to a budget being established and agreed.
KEYFACT
For single premium recommendations, affordability must be shown at the point advice is given.
Regular premium affordability must also be shown throughout any product term.
Before the financial adviser goes back to present their recommendations to the client, they must consider the options available and which they feel is most suitable for their client’s identified needs.
7.3.2: The presentation call
These documents assist the adviser in their explanations, and the client in their understanding.
Point of sale key documentation
A few key documents will need to be provided:
• Key Features Document (KFD)
• Consolidated Life Directive Summary
• Principles and Practices of Financial Management (PPFM)
A key features’ document is commonly abbreviated to KFD, KFI (Key Features Illustration) or KIID (Key
Investor Information Document).
A key features document must always be provided where a recommendation is being made, and must
include certain key areas.
This document is broken down into two parts: a generic section and client-specific section.
The contents of the generic section of the KFD can be remembered using the mnemonic ARCTIC: • Aims • Risks • Costs • Tax Implications • Cancellation rights
The second client-specific part of the KFD is a projection, illustration, or quotation:
This must always be provided, as it explains to the client:
• Costs involved
• A projection of growth, based upon reasonable expectations
It will also show the client the specific charges that are applicable for the advice given.
Remember, prior to this point, the client has only had a generic explanation of charges during the initial adviser disclosure.
Other documentation
A Consolidated Life Directive summary:
This includes certain minimum information about the insurer and their commitments to policyholders, for pure protection policies. A copy must be provided before a life-assurance contract is concluded as outlined in ICOBS rules, as pure protection policies come within this remit.
Pure protection policies provide cover that has no investment element.
A Principles and Practices of Financial Management (PPFM) booklet:
This is an extra booklet given to clients with with-profit policies, which explains how with-profits are
managed.
Fact Find CONT3..
Other documentation
A Consolidated Life Directive summary:
This includes certain minimum information about the insurer and their commitments to policyholders, for pure protection policies. A copy must be provided before a life-assurance contract is concluded as outlined in ICOBS rules, as pure protection policies come within this remit.
Pure protection policies provide cover that has no investment element.
A Principles and Practices of Financial Management (PPFM) booklet:
This is an extra booklet given to clients with with-profit policies, which explains how with-profits are
managed.
There is a consumer-friendly version of the PPFM know by the catchy title of CF (consumer friendly) PPFM.
This must be provided to clients with with-profit policies:
• at the point of sale
• annually
• if there are any changes to the with-profit fund
Once the adviser has presented both parts of the KFD, the obvious next step is to ask for the business.
Application Form
To proceed with the business, an application form must be completed.
Clients should be encouraged to complete these themselves to ensure that everything is declared and correctly articulated.
There is no rule to say an adviser cannot compete applications however, and many do complete them on behalf of clients. If an adviser completes an application form for the client, the following rules should be adhered to:
• The client signs an agreement, allowing the adviser to complete this on their behalf
• The client is present at the time
• The client carefully reads through, and then signs and dates the application form
All ‘material facts’ must be disclosed by the client on the application form as per the principle of ‘utmost good faith’ that we discussed back in chapter 3 of this study guide.
The application form will also contain some method of payment, such as a direct debit or standing order form. From here, having completed the presentation and all the required paperwork, the adviser will then have several things to do post-advice. We look at that next.
7.3.3: Post advice
First thing to be done post-advice is the production of a suitability report or letter. This summarises the process and recommendations and provides a written record of the advice that has been given.
From a regulator perspective, anyone reading a suitability report should be able to clearly see what advice was given, how it meets the clients’ needs, any risks and disadvantages, as well as why the recommendation
is suitable. Affordability must also be clearly shown.
KEYFACT
The regulator’s benchmark is: ‘Can an independent third party see why the advice given to the client is suitable’?
Suitability of recommendations
A suitability report must be provided when a firm is recommending that the client should:
• take action in relation to a life or income protection product
• buy or sell collective or structured investments
• buy, sell, surrender, convert, cancel, or suspend premiums to a pension contract
• commence income drawdown from a pension
• enter into a pension transfer or opt-out arrangement
The suitability report should be personalised to the client, outline to the customer what is being recommended and why, and be jargon-free.
Any firm or tied firm must not make a recommendation unless it has access to a suitable contract.
All records must be kept for the standard timeframes covered previously.
Just to recap,
A suitability report must specify;
• the client’s demands and needs
• why the recommendation has been made and why it is suitable
• any possible disadvantages of the transaction
• a summary of the main consequences and risks
Certain product types, mainly pensions-related such as a Self-Invested Personal Pension (SIPP) or Personal
Pension Plan (PPP), need a comment as to why stakeholder schemes were discounted.
This is due to the higher charges associated with SIPPs and PPPs, in comparison to a stakeholder pension, where charges are capped at 1.5% reducing to 1% after ten years.
There must be a clear reason why the adviser has recommended these more expensive products, and this
must be clearly shown in the suitability report.
The same principle applies to the use of FSAVCs over AVCs.
KEYFACT
SIPP or PPP recommendations must show in the suitability report why they are at least as suitable for the client as a stakeholder pension.
This means confirming that the more expensive features associated with these pension schemes are going to be used by the client. Otherwise, they would be better off with the cheaper stakeholder pension.
The regulator’s prime concern is that genuine client interest, rather than adviser remuneration should determine the adviser’s recommendations. They issue ‘guidelines’ to be followed in making suitable
recommendations:
• Advice is considered and is purely in the client’s best interests
• Each need should be quantified, and any shortfalls calculated
• A list of suitable products should be identified and the most suitable recommended
• A balance of advantages and disadvantages must be listed for the client
• It must be made clear that past performance does not guarantee future returns
Issuing Suitability Reports
The report must be produced and dispatched as soon as possible after the transaction has been completed.
In the case of a life policy, this means before the contract is concluded. Friendly societies with low premiums (£50 per annum or £1 per week) are exempt.
KEYFACT
Ultimately, the suitability report must be with the client no later than when they receive their cancellation notice.
Consideration of existing products
Existing products and policies should always be considered, as should state benefits. Whether state benefits are taken into account is largely up to the client, in discussions with the adviser.
To retain or surrender is often a more difficult decision to make than it appears.
Increased competition, and advances in medical science, can drive down costs, but getting older, with more aches and pains, can drive these straight back up again!
The FCA suggests that, in the great majority of cases, continuation of existing plans will be the recommendation unless they are clearly unsuitable.
Any recommendation to change must be backed by sufficient rationale as to why, and the adviser needs to ensure that there are no time gaps in the cover that would leave the customer exposed to undue risk.
‘Churning’ - the rearrangement of a customer’s policies to purely benefit the adviser - is illegal, and must not be recommended.
Post advice CONT1..
Client duty of care
The adviser must ensure that the recommendation is ‘pitched’ at the right level, given the clients previous experience.
It may also be the case that a client declines the advice and wants to take out a contract that the adviser
would not recommend.
Each case deserves its own consideration here but, whether the adviser progresses to application or not, the
report should clearly outline that the product taken goes against the adviser’s recommendation and outline why. Remember, this is known as an insistent client.
Risks
Firms must take reasonable steps to ensure that a client understands the risks involved in any contract. Risks should be explained in terms that a client can understand.
Individual clients have different appetites for risk and their aims and objectives must always be considered.
An important question that each adviser must consider is ‘does the client need to take such risks to achieve their aims’? A portfolio of investments must also consider the customer’s ‘capacity for loss’.
Cancellation and cooling off rights
Many transactions for investments have cancellation rights built into their terms and conditions.
This info bellow shows an overview of which products / transactions have 14 or 30 days cancellation rights.
14 Days • Opening and transferring ISAs (assuming advice is given/not execution-only) • OEICS • Child Trust Fund • Enterprise Investment Scheme
30 Days • Life policies • Most pension arrangements • Annuities • OEICS and EISs purchased as part of a wrapper alongside life policies
