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Show your strongest suit

Whether an organisation is tied or independent, small or national, personal or corporate client focused, facing the prospect of a periodic inspection visit from the regulator can be daunting.

Periodic inspection visits often identify recurring themes across the financial services industry. These include insufficient evidence of knowing the client, uncertain product suitability and insufficiently robust reasons why letters.

At one end of the spectrum, there may be concerns that product sales are little more than “order taking”, with insufficient evidence of an advice process having been followed.

At the other end, the client may receive high quality and sophisticated advice but without the reasons why being explained adequately.

Far too often, it seems that compliance is viewed as an afterthought when the advice has already been given. In truth, compliance is essentially good business practice which should form an intrinsic part of the advisory process throughoutto enhance client relationships and mitigate business risk.

Advisers often struggle to show adequate evidence of suitability because core elements of the know your client and advice process have been circumvented.

If you have not clearly identified the objectives and addressed key issues at the client meeting, it can be somewhat difficult to show suitability subsequently in the fact-find and reasons why letter. The key is to consider the compliance issues even before the first client meeting so that solid foundations can be evidenced.

It is often a good idea to consider the key themes that the regulator will look for in the fact-find and/or reasons why letter. Typically, these will include:

l A clear statement of client objectives.

l The client&#39s (and, where applicable, their partner&#39s) attitude to risk. The client may have different views for different areas of financial planning, so do not be afraid to clarify the client&#39s response.

l The product recommendation and rationale. This should include:

– Clear audit trail for advice given.

– Clear links to client-specific objectives.

– Reference to other reasonable alternative solutions discussed, for example, National Savings and Isas, with objective pros and cons. Tied representatives, in particular, need to remember that they still have a responsibility to provide generic advice.

– Clear rationale as to why the recommendation is the most suitable.

– Clear rationale as to why the product type is most appropriate, with links to the client objectives.

– For IFAs, client-specific reasons for company selection.

l The risk or health warnings given to the client.

The adviser must present all the mat-erial information, regardless of whetheror not the fact-find prompts a specific question. The perfect fact-find probably does not exist. Therefore, fact-finds should be considered a solid track to run on but may need expanding.

The biggest single failing of many completed fact-finds is the lack of “soft” facts captured. Without obtaining adequate information about the client&#39s feelings, desires, fears and views, arguably, you cannot show satisfactory evidence thatyou know your client.

Advisers are expected to professionally challenge, probe and disturb the client. An adviser may be tempted to note the client&#39s responses but without going through this essential process.

A simple example may be a note on the fact-find stating that the client “…wanted to save money to use in 15 years&#39 time”. The adviser should be probing to ascertain if there is a specific purpose planned for the funds, exactly why 15 years is appropriate and if there might be a realistic need for earlier access.

If the adviser disagrees with the client – for example, he may recommend a 10-year contract because of early surrender charges – he should challenge the client&#39s rationale, record his own specific recommendation and explain why he considers this more appropriate.

It is always the client&#39s prerogative to ignore the advice but it is essential that the advice and rationale is documented.

The regulator will want to see clear reasons as to why the generic product and the specific provider were selected as the most appropriate to meet the client&#39s specific needs and objectives. It is essential to capture the right information at the client interview stage.

A simple technique is to list the key client objectives agreed and to link these to the recommendation. The simple example shown in the box (far right) may help to illustrate the point.

In this case, the client is seeking a retirement vehicle which offers a range of internal and external fund links in order to spread the investment risk.

However, if the financial adviser does not clearly identify and state the need for a choice of funds, by simply referring to this product feature in the reasons why letter, he is merely giving “reasons what” information, without clarifying what specific client objective is being met by the feature.

This links back to the very basic concept of FAB – features, advantages and benefits – which is a recurring theme identified by the regulator and which can potentially be a costly rule breach.

If evidence of suitability cannot be shown, the question of client financial disadvantage may be asked, which can be a difficult, time-consuming, and costly exercise for the insurance provider or IFA to try and rectify retrospectively.

Even experienced advisers working on complex cases can get caught up in the detail of their reports and sometimes miss key elements of report structure from a compliance perspective.

Remember, the golden rule is: “If it&#39s not on the file, it didn&#39t happen.”

So make sure there are well documented meeting and telephone discussion notes linked into the report to provide an adequate audit trail.


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