It is not just a concern for banks, insurers and investment firms as it will affect all financial advisers. This is because the FSA needs to bring in a new set of conduct of business rules as a result of Mifid’s requirements and, at the same time, it is taking the opportunity to identify any unnecessary rules.
If you are interested in what is going on, the current position on the new Cob rules can be seen at www.fsa.gov.uk/pubs/ policy/key_markets.pdf
With the £50m (gulp) that the FSA is spending on moving towards principle-based regulation, including the over-arching treating customer fairly principles, do be aware that many advisers and product providers are facing the possibility of being caught as being non-compliant by following either the set of FSA principles or the Mifid rules. It will be difficult to follow both.
Meanwhile, the FSA has said trade associations, professional bodies and firms will be able to seek formal confirmation for the guidance they generate to help members understand and meet the FSA’s regulatory requirements.
Er, I would not hold my breath in expectation of a barrage of phone calls to the FSA as many issues raised with trade bodies or professional bodies occur when there is a potential breach of the compliance rules or something has gone wrong, such as a bank or building society becoming a single tie and forcing employed advisers to stop providing independent advice.
There will be tighter requirements on client categories and suitability of advice in the new Cob rules, such as the need to start notifying new clients of their categorisation as a retail client, professional client or eligible counterparty. Firms also need to provide a suitability report covering any personal recommendation or decision to trade. To make a suitable recommendation, a firm must gather information about the client’s knowledge and experience, financial situation and investment objectives. This may not sound too onerous (it is not) but can you tell me succinctly what a retail and professional client is and what experience is relevant when providing advice?
Advisers have consistently been reprimanded by the FSA for not keeping proper records relating to client needs and circumstances. Once, following an FSA inspection, it wrote to our compliance officer stating that I did not record enough detail of one of my client’s needs and circumstances – a strange reprimand as the file inspected was clearly marked to show the client was in fact my mother.
The FSA has set March 2008 as the next deadline for advisers to show they have appropriate management information or measures in place to test whether they are treating customers fairly and by the following December that they are consistently treating customers fairly. I am convinced that the reliance on technology to keep compliant client records and to help treat clients fairly will increase rapidly. The FSA continually reminds us that technology providers and sourcing systems are not regulated and compliance responsibility lies on the broker or adviser but what do we want from technology providers to meet the rules?
A reasonable place to start is in the back office, which should be able to hold the new classification details of clients and provide standard paragraphs to ensure consistency is provided from one client to another in the suitability reports, which then can be checked automatically and electronically by compliance to ensure TCF.
All product types should be able to be sourced for illustrations, benefits and costs, with complete disclosure information. All this on top of the expected bag of planning tools and seamless integration with advisers’ front office. Is this too much to ask from technology? I think not.
Kim North (firstname.lastname@example.org) is director of Technology and Technical