With more and more information flowing from the FSA on treating customers fairly and what they expect from small firms, it was interesting to be invited to sit in on a visit by the FSA’s Edinburghbased TCF team to one of our clients.
The good news, from this visit at least, is that the FSA was not approaching this as an interrogation. In a relaxed atmosphere, the FSA team asked the MD a lot of questions across a range of subjects, from the industry in general to how the firm operates and, of course, TCF and the firm’s views.
The flow of information around the firm was another important area of discussion. The FSA also wanted to see how this was recorded and how the firm could demonstrate to the FSA that the culture of TCF had been communicated to the employees of the firm and how it was being measured and updated by the management team.
What clearly emerged from the visit was the heavy reliance placed by the FSA on four main areas:
– Training and competence.
– The directors’ views and acceptance of TCF.
– The sales process.
– Acceptance of TCF by the advisers and admin staff.
Training & competence forms an important part of TCF as this is one of the key measures by which a firm can assess the way TCF is being adopted by the advisers and the quality of the advisers themselves. With a robust and comprehensive T&C scheme, the firm can identify areas where an adviser may not be treating his or her clients fairly. This may not be deliberate but simply a knowledge gap which could result in behaviour that may be construed as being unfair.
It should be possible to assess the skills of the individual adviser in front of the client, such as are they introducing the IDD and menu correctly and giving the client a genuine choice between fees and commission rather than a quick comment that they have the option?
Has the adviser got the technical knowledge to discuss and explain risk, charges, taxation, exclusions and definitions within a contract, allowing the client to make that all-important informed decision?
Or is the adviser clearly offering the client a full comprehensive review or is he or she limiting the advice to one area?
This is an important area of the advice process and one which can lead to liability issues if not handled correctly.
Broadly speaking, limiting advice to one area should be client led, not adviser led. Advisers should always offer a full review at the outset and clearly document if the client requests that advice is limited to one or more areas and that appropriate warnings have been given concerning the risks of doing this.
From the T&C assessments, any knowledge gap or development issues can be identified, training provided and the adviser’s knowledge and ability improved to the point where the clients receive an improved service.
The importance of this element of the T&C process in the context of TCF cannot be overemphasised. The T&C process must identify weaknesses but cannot stop there. The firm must then have robust procedures in place to ensure that those weaknesses are addressed by appropriate training and re-assessed as a matter of priority. The FSA is very focused on this area of T&C which is often neglected by firms.
The sales process itself was also closely examined during the visit and in particular the quality of the paperwork. If you cannot prove in writing that you have treated your customer fairly, then there is, of course, no evidence at all as far as the FSA is concerned. A fully completed fact-find is an important start, backed by appropriate independent research and a well constructed suitability/ closure letter telling the whole story. (This is where full and limited advice needs to be well documented for the firm’s own protection).
The feedback given to our client firm at the end of the day and in the follow-up report was, I am very pleased to say, very positive and a reflection of the firm’s attitude towards TCF and the hard work it had put in not only on TCF specifically but to the firm’s process of training, T&C, the sales process and the evidence it had to prove it is hitting the required standards. The visit demonstrated that if a firm is already operating to high standards, it should not be necessary to re-invent the wheel in order to comply with TCF. It is more a matter of ensuring that all the good work already being done is co-ordinated and documented properly.
Conversely, if a firm is failing on TCF, this is probably an indication that the firm has historically failed to meet the FSA’s standards in the other various areas of its rulebook (for example, T&C, Cob). It needs to get these right before it can even think about co-ordinating a TCF approach.
A lot has been written over the last few weeks about mortgage arrears, churning and commission bias. When viewed in the context of TCF, there are some worrying signs if the client file is not as robust as it should be.
With mortgage arrears, for example, since October 2004 it is the adviser’s responsibility to prove the mortgage is affordable and therefore the fact-find has to demonstrate that the mortgage is affordable based on the client’s circumstances, including when fixed and discounted periods end and taking into account any likely changes in the client’s circumstances.
By not having a well documented fact-find, the view could be not only that you have not treated your customer fairly but that you are open to a complaint which will be difficult to defend.
For most firms, adopting a TCF policy by March will not be a major issue but for those firms which think it does not affect them, consider the current complaint levels and fines issued by the FSA. TCF is here to stay and the FSA expects.