Good and poor practice in the advisory process

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Learning objectives

• Understand the FCA’s key requirements when disclosing adviser charges and services

• Understand the FCA’s expectations on suitability of advice

• Explore the main issues involved when assessing the level of risk the client is willing and able to take

• Identify if any further action is required to improve the existing advice process

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Why am I here?

• COBS 9.2.2 …

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www.handbook.fca.org.uk/handbook/COBS/9

The story of advice

• Beginning - Understanding the Need

• Middle - Establish the Solution

• End - Presenting the Solution

A ‘good’ file

• Advice Process/File Checklist• Disclosure• Key Features Illustration• Know Your Client (KYC) Information• Attitude to Risk (ATR) Assessment• Capacity for Loss• Research• Suitability Report• Client Reviews

Not Exhaustive

• Would your files stand up to challenge?

Initial disclosure: ‘Generic’

Charging structure

o Percentage – cash terms examples

o Hourly – number of hours for each service

Services

o Scope of service – independent or restricted advice

o What services provided – initial and ongoing

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Initial disclosure: ‘Specific’

As early as practicable

Cash terms

If different from the charging structure – why?

Good practice

o If dependant on market price – estimate in advance

o Letter of engagement

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Test your disclosure

www.fca.org.uk/firms/adviser-charging-rules

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Disclosure design tips

• Linking related information

• Font size

• Tables and diagrams to explain complicated information

• Use of bold text, colour and highlighting

• Keep it short

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KYC information

• Objectives

• Individual Needs

• Term

• Why Growth/Income - Level, Increasing, Decreasing

• Comments Sections/ Free Hand Comments (Not just ‘tick box’)

• Hard/Soft facts

• Knowledge and Experience

• Specific sections

Prioritisation

Suitability reports

Assessing risk

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The story of advice

• Beginning - Understanding the Need

• Middle - Establish the Solution

• End - Presenting the Solution

Selection process/research

Some considerations…

Provider's: • reputation and financial standing• investment style/approach/Performance• approach to investment selection/due diligence• terms and conditions• charges• funds, tax wrappers and other products/Flexibility• asset classes• functionality • additional tools• support services

Not exhaustive

The story of advice

• Beginning - Understanding the Need

• Middle - Establish the Solution

• End - Presenting the Solution

Suitability reports: COBS 9.4

• Demands and needs

• Why suitable for the client

• Possible disadvantages

(additional guidance for some more complex areas such as income withdrawals and pension transfers)

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Suitability reports

• evidence of client needs and objectives

• why do you believe the advice is suitable/ client benefit / disadvantages

• confirmation of client attitude to risk and reconfirmation of risk descriptions

• replacement business comparison of existing arrangements with new arrangement

• reference to documents (eg KIIDs and KFDs)

• any loss of benefits/exit penalties to the client

• if your recommendation is more expensive, why?

• why provider recommended

• importance and confirmation of review process/ cost of advice

Not exhaustive and to be relevant to the client

Client Reviews

• No requirement– client must be clear

• How do you ensure they happen on time

• Revisit all key info– ATR especially

• Document review has happened

FCA final notices

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Firm Fine

Mr Mosley £10.5K

Moneywise c.£20K

N-hanced LLP £21k

Sett Valley £28K

Pi Financial £58K

Cricket Hill £70K

Westwood £100K

Savoy £412K

RSM Tenon £700K

Sesame £6M

https://www.fca.org.uk/publications (Notices & decisions)

Summary

• KYC foundation of good advice process

• Clear and comprehensive documentation

• Consider if the consumer is in an ‘informed position’

• Good controls drive a good advice process

Would your file tell the story of advice?

FCA Consultations

• FCA Mission – Closes 26 January

https://www.fca.org.uk/publications/corporate-documents/our-future-mission

• CP16/42: Reviewing the funding of the FSCS – Closes 31 March

https://www.fca.org.uk/publications/consultation-papers/cp16-42-reviewing-funding-financial-services-

compensation-scheme

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Learning outcomes

• Understand the FCA’s key requirements when disclosing adviser charges and services

• Understand the FCA’s expectations on suitability of advice

• Explore the main issues involved when assessing the level of risk the client is willing and able to take

• Identify if any further action is required to improve the existing advice process

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Questions?

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