Investment quality of advice processes
These are the preliminary findings of the 2007 review of the investment quality of advice processes. Overall, the findings show that most firms reviewed are making progress towards having appropriate advice processes in place, but a significant number still have more to do in some key areas.
The review was carried out between September and December 2007. We visited 50 advisory firms and a further 50 were mystery shopped as part of our wider 'thematic' work on improving the quality of advice. This was a follow-up to similar work in the first review, the results of which were published in July 2006.
Good practices identified
- There was a significant proportion of firms giving impartial advice in that they recommended repayment of debt and non-commission earning products before recommending an investment, or refunded commission where the commissions paid to them were not proportionate to the work carried out:
- The vast majority of firms visited were offering and conducting regular reviews of their customers.
There were many examples of good practice, a number of which we intend to publish in April 2008 alongside examples illustrating areas for improvement.
Key areas for improvement
Management Information and SYSC
- Whilst the vast majority of firms gathered relevant management information about their businesses, more of them must ensure that they actively analyse and use that information to review their processes – and consider it as evidence to demonstrate whether they are treating their customers fairly.
- Firms must work harder overall to demonstrate adequate systems and controls to monitor their advice process; many firms need to adequately consider findings from their review of customer files as part of their management information.
- In some cases, the monitoring of customer files appeared to only concentrate on the completeness of the files rather than reviewing the quality of the information gathered from, and provided to, customers as recorded in the files. In other cases, where issues were picked up, they were not followed up by remedial actions or learning and development requirements being put in place.
Assessment of customer needs
- Firms must do more work to demonstrate that they have gathered sufficient know your customer information when assessing customer needs:
- identifying and recording customers' needs and objectives;
- establishing and recording customers' attitude to risk; and
- exploring all areas of financial needs when giving full advice.
Communication
- Suitability letters continue to be the main area of concern. They must be clear, fair and not misleading. In the review, in a number of cases:
- there was no explanation of the reasons for switching products / funds;
- the letters were insufficiently personalised and contained jargon; and
- the risks and charges associated with the recommendation were not specified.
- Firms that provide "focused advice" to customers must make their customers adequately aware of the implications and risks of receiving such advice.
Payment options
- It remains a concern that a number of the firms mystery shopped did not offer customers a genuine option to pay by fee.
- In some cases, customers were dissuaded from paying by fee.
In line with our recently launched enhanced strategy for small firms, our approach is one of support for those firms who are making progress towards having appropriate advice processes in place, combined with tough supervisory – or even enforcement – action for those who are not.
Further information
We have worked with the industry to develop a number of tools to help firms in the areas we have highlighted for improvement as a result of the findings of the 2006 work (management information, assessing customer needs, communicating with customers). These tools can be found on our small firms website and we encourage all financial advisory firms to make use of them.
Tools for financial advisers
Having appropriate advice processes in place is an important element in supporting delivery of the right outcomes for consumers when giving advice – and in helping firms to demonstrate they are treating their customers fairly. We launched our enhanced strategy this month to help small firms meet their TCF obligations. All financial advisers and mortgage intermediaries will be assessed as part of the strategy, as will general insurance firms selling high risk products. The aim is to provide firms with the assistance they need to ensure they are treating their customers fairly.
The results of the first review of Investment Quality of Advice Processes were published in July 2006.
Treating Customers Fairly (TCF) update
A second review of the Mortgage Quality of Advice Processes is being undertaken and the findings will be published in Q2 2008.
TCF 2008 deadlines
Treating customers fairly (TCF) - an important year ahead