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A plan for all reasons

Increased regulatory interest in the way IFAs justify product provider selection was heralded by an FSA survey earlier this year among networks and bigger IFAs.

The ability to conduct a full review of products and providers to offer tailor-made financial solutions to clients is a key market advantage for IFAs. To build on this unique market position, we need to be in front of the regulator&#39s expectations in this area.

With this in mind, I would like to examine and align the product provider research process with new FSA expectations to ensure we retain our pole position. The new FSA Conduct of Business Sourcebook states:

An IFA must obtain information about their customers to enable suitable advice to be given.

An IFA must not make a personal recommendation to a customer to buy a product if that IFA ought reasonably to be aware of a generally available product which would be more appropriate to the needs and circumstances of the customer (COB 5.3.9R).

In complying with COB 5.3.9R, an IFA should have adequate knowledge of and have regard to products available from the whole market.

How do you comply with these rules? Clearly, the factfind process will elicit most of the information needed to tailor your advice to your customer&#39s needs so you can justify the product type if challenged by either the regulator or your supervisor/compliance department.

However, how many IFAs have records that are able to justify the choice of product provider to comply with the last two COB requirements?

All too often, the regulator has either issued warnings or, on visits to IFAs, commented that there is insufficient tailoring of recommendations to make them client-specific.

A generic recommendation for XYZ Insurance Company, where there is no correlation between the product provider selected and the needs of the client, will not meet regulatory requirements.

Client-specific is not just about the suitability of the product type, for example, a maximum investment plan or a low-yield unit trust for a higher-rate taxpayer. Client-specific product selection means marrying the client&#39s attitude to risk to a suitable fund and choosing a product that has the features needed.

The best way to document a client-specific product recommendation is to produce a suitability letter tailored to the customer&#39s needs. COBS 5.3.14R stipulates the requirement for a suitability letter. Under current rules, these are referred to as reasons-why letters.

Guidance on the contents of suitability letters is included in COBS 5.3.30. A suitability letter should explain simply and clearly why the recommendation is viewed as suitable after considering the customer&#39s circumstances, needs, priorities and attitude to risk. It is important to link these clearly to the product recommended rather than setting out stock motives that may apply to all customers.

When constructing a suitability letter, you should not merely state which product is being recommended but also include a link to the customer&#39s personal circumstances.

IFAs must highlight why a particular product provider has been recommended. This may include financial strength, product features not available elsewhere, price, performance track record, investment prospects and service levels. This list is not exhaustive but provides an idea on the depth the regulator expects IFAs to go into to justify their recommendations.

Below (left) are examples of poor and suitable client-specific recommendations. The suitable version ensures the customer understands why the recommendations meet his or her needs, but what about the regulator?

In addition to the suitability letter, it seems reasonable to have file notes on how you have reached the conclusion that ABC&#39s product is suitable for your customer from the myriad of providers available.

There are a variety of ways of achieving this. For rate-driven products, a comparative illustration from sources such as AssureWeb or The Exchange will suffice. For feature-driven products, research can be based on lists of recommended products, panels, DIY analysis of products or results from software data such as ProdPak, Aequos or Synaptics.

Even for the most experienced and diligent of IFAs, conducting client-specific product research across the whole market is very time consuming and potentially costly. Many networks, nationals and bigger regionalised IFAs have central teams that conduct research using specialist data and skills.

Nowadays, a number of IFA practices employ paraplanners to provide technical support, product research and sometimes administrative support in processing the business and liaising with product providers.

There are many advantages and some perceived problems with product research being conducted centrally at arm&#39s length from the customer.

First, how does the central team know your customer&#39s needs? Let me turn that round. Any centrally produced panel or list of recommended providers must recognise that many customer needs cannot be second-guessed. It is therefore important that panels are flexible, meet a broad need but, most important, recognise that to meet the varied needs of customers it is necessary to deviate from the panel on occasion.

Next week, I shall consider in more detail what research an IFA is expected to conduct to justify regulatory requirements. I shall also look closely at the issues surrounding panels, the perceived problems with them and how they can work.


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Monday, 3 September 2001.Type: Discounted rate flexible mortgage.Discounted term: Six months.Discount: 1.5 per cent.Payable rate: 4.8 per cent.Minimum loan: £30,000.Maximum loan: Up to 90 per cent of valuation subject to no maximum.Income multiples: Three times principal income plus second or 2.5 times joint.Features: Overpayments, payment holidays, lump sum withdrawal, interest calculated daily.Arrangement fee: £295.Redemption fee: […]

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