In April 2016, the Financial Conduct Authority (FCA) started to review a sample of over 1,000 advice files to determine the standard of advice being provided to consumers.
Advisers are awaiting the findings of the review, which is expected to land imminently. Advice has been on the regulator’s agenda for a number of years, so the review will touch down in the midst of an ongoing debate within the profession.
Given the issues we are seeing across the sector and what we know already about the advice discussion from a regulatory point of view, it is possible to discern some of the likely outcomes of the review and provide firms some early food for thought.
Advice standards
A key area of focus for advisers is delivering recommendations that represent value for money. This is an important factor in ensuring customers receive fair outcomes. Firms sometimes fall short in this area when placing clients on platforms where there is no tangible client benefit. No matter how much functionality a platform has, if the client is not using its functions, the platform will not offer value for money.
Another area to consider is any potential conflicts of interest that exist in a firm’s business model, and how this might effect customer outcomes. For example, vertically integrated models offer potential benefits for consumers and firms, but there are inherent conflicts. Firms must ensure conflicts are clearly disclosed and managed appropriately.
Other areas of focus will likely include ensuring recommendations are consistent with the client’s risk profile and, for replacement business, whether firms can demonstrate the new product is more suitable for the client than the existing one.
File quality
It is likely the FCA will comment on the ‘know your customer’ information firms hold on file, including client circumstances and objectives. Without this information, it is difficult for firms to ensure they are giving suitable advice.
The report may also cover disclosure of charges. It is important files clearly demonstrate the client is aware of the total cost of ownership (i.e. product, fund, platform and adviser charges).
Another area of focus could be the standard of research on file in relation to recommended products and funds. The results of the review will shed more light on whether any issues in this area are widespread.
The suitability of advice depends on the robustness of the related operating model. Inadequate processes that help ensure suitable advice is given (including processes for obtaining sufficient customer information) can contribute significantly to poor outcomes.
Firms should ensure they can show evidence of their processes for obtaining client information. They should consider the benefits of periodic quality of advice reviews, which help to gain assurance their processes are leading to suitable recommendations for clients.
Outcome focus
It is important to consider outcomes testing and root cause analysis on advice outcomes. The lessons learned from this can be used to inform an ongoing view of performance and identify areas where processes can be improved.
Staying up to date on market and regulatory developments will help firms maintain a contemporary view and allow them to react proportionately to changes.
Firms are close to getting the FCA’s latest view on advice, although it is unlikely the review will result in many assertions not already being discussed throughout the profession. The findings will provide clarity on where the regulator believes firms need to improve.
Firms can pre-empt what is to come and think about their approaches in the aforementioned areas. The most important activity for firms is to review their existing methods to help ensure clients receive suitable advice.
David Boyhan is senior consultant at regulatory consultancy Huntswood.