2018 in review: Where regulation raised the bar and missed the mark

In the second part of our regulatory recap for 2018, two more experts talk to Money Marketing about their highlights from the last 12 months.

Were advisers up to the ongoing suitability test?

Julie Hepworth, group regulatory director at Perspective Financial Group

2018 has been a year of embedding and refining the requirements of Mifid II for advisory firms’ ongoing advice procedures.

Moving into 2018, firms already had established processes and diary systems in place to ensure that they completed reviews for ongoing fee paying clients in a timely manner, but the introduction of Mifid II raised the bar further.

Firstly, the requirement to reassess and reconfirm ongoing suitability, on the face of it, does not sound like a particularly onerous task given the depth of relationships that advisers typically have with their clients. But the term “reassess” triggers the need to review all of the know your client areas that would need to be considered when providing new advice. This must then be fully documented on the client file and confirmed in writing to the client to satisfy the periodic suitability assessment requirement.

Secondly, this must all be completed at least annually, which, assuming the firm has a system in place to deliver these requirements, should be achievable providing clients engage in the process at this frequency. Where a client does not engage in the review, the firm needs to decide whether it can continue receiving an ongoing fee. If it is unable to reassess and reconfirm ongoing suitability, it is unlikely that it will be able to.

These new requirements that came into being at the start of 2018 created legislative obligation on the firm as opposed to commercial, therefore each firm’s systems and controls need to reflect the requirements. Given that ongoing reviews are now essentially subject to the same requirements as new advice, suitability of advice file checks should now include ongoing reviews in addition to new business as it is equally as important to review to ensure that quality standards are being maintained.

Likewise, the firm’s senior managers should have visibility of each adviser’s and the firm’s ongoing review management information covering timeliness of review completion, issuance of the review letter to the client, number of clients (if any) that decline a review, and those that do not respond or engage so that emerging trends can be spotted easily and addressed.

This all makes good business sense but will have caused firms to be stricter with those clients who have a tendency not to engage as frequently as required. In more extreme scenarios, it has caused firms to terminate some ongoing relationships where clients are not engaging at all.

Getting the basics right could keep you safe

Russell Facer, managing director at Threesixty

This past year has flown by. It seems like only yesterday we were gearing up for Mifid II. Can you believe that was almost a year ago?

Has 2018 been a seismic shift year though? I don’t think so.

We’ve certainly seen a wealth of significant changes. With extended charges disclosure, 10 percent drop notifications, GDPR affecting all businesses – even school trip notifications – , the insurance distribution directive, and new requirements for defined benefit transfers, it’s definitely been a busy year.

But, disappointingly, some things haven’t changed. The basics remain an issue.

The hottest topic, after costs and charges disclosure, is DB transfers. There’s been discussions in parliament, widespread press coverage, even regular TV coverage of the British Steel scandal. But, when the regulator issued its recent comments on their follow up DB file review sample, its areas of concern remained at a basic level: know your client and client objectives.

If the files of those firms who have carried out largest numbers of transfers are reflective of the comments being made, there’s a concentration risk for the industry. I hope they continue to get professional indemnity insurance cover and continue to trade.

Transfer business has been a significant income stream and asset windfall for some firms. If they leave now, and issues arrive, then the liabilities are left with the remaining entities and the Financial Services Compensation Scheme. The restructuring of the FSCS earlier in the year didn’t add any risk premium or separation of activity but remains as a collective protection.

Market fluctuations are expected in 2019. The UK’s exit from Europe will truly see advice processes tested, but not by the regulator – it’s already commented – by clients. We know performance isn’t a reason to take a complaint to the Financial Ombudsman Service, but it’s widely recognised that if portfolios drop in value, the likelihood of a complaint increases. 

Although complaints are often dressed as a lack of understanding of the client’s positions, their real objective or the appropriateness of the risk being taken, it is commonly performance that has triggered them to consider whether the original advice was correct. Whatever the reason for a complaint it is the basics of advice that are tested. Being positive, complaints can be a great way to learn about a firm’s systems and controls. With the Senior Managers and Certification Regime coming in at the end of next year, it could help firms focus on their processes and management information. But, it’s a little late in the day to be learning.

Regulation should rarely be the reason for a firm to do something. If you’re focused on doing the right thing for your client, you’ll normally satisfy most regulations. As such, understanding your client’s position and educating them on your recommended solution – helping to avoid a situation where your client gets a surprise from an investment journey – remains the simplest way to satisfy the requirements.

There’s a rocky road ahead for 2019. The broader population is likely to be more effected by the cost of credit than transfers, therefore it’s likely that claims management companies will be active in credit during the coming year. CMCs are getting more efficient and may target DB transfers too.

The key for 2019? Do the basics well.

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