Process of giving financial advice: FSA says firms need to improve
Briefing Note 024/06
19 July 2006
The Financial Services Authority (FSA) conducted 'thematic' work to examine the process by which advice on investment products is given by firms to customers. The work has found many examples of good practice but, in an unacceptable number of firms, the work identified substantial failings in the process by which advice on mainstream products is given.
To help firms improve and understand how they can meet the principle of Treating Customers Fairly, the FSA has produced:
- a report for advisers, setting out the findings and highlighting examples of good practice;
- a toolkit for firms to help identify areas to focus on where relevant to their business model; and
- case studies which contain further examples of good practice.
The FSA reviewed the process for giving investment advice in both large and small financial advice firms, basing its research on typical customer requirements. It visited a representative sample of 50 firms and "mystery shopped" a further 50 to determine whether the way they advised customers adhered to the Treating Customer Fairly principle. It also visited three large banks, one product provider and one distributor, and observed some similarities with the findings from the visits to financial advice firms.
The main areas identified as needing improvement were:
- Training and competence – the quality of the advice process is better in firms with robust training and competence regimes that identify and fill gaps in advisers' knowledge and skills;
- Processes for establishing clients' goals and risk appetite - before giving advice, advisers should be clear about what customers can afford, their objectives, their attitude to risk across different objectives and that they understand and accept the risks they will take on;
- Production of clear suitability letters - in confirming their recommendations to clients, advisers should ensure that their suitability letter is succinct, but reflects the discussion with the client, uses plain language, highlights the risks involved as well as the potential rewards, and provides a balanced view. In some cases the FSA found that firms completely failed to issue suitability letters, a breach of FSA rules;
- Systems and controls for monitoring the advice process - around half of the firms surveyed could not demonstrate that they monitored the quality of advice given;
- Clarity on type of advice offered – some firms need to be clearer in distinguishing between whether they are offering ‘full advice’ or ‘limited advice’ to a customer. Suitability should be considered on a case-by-case basis and it should not be assumed that a ‘limited advice’ approach would be suitable for all customers. Where it is agreed that advice limited to one or more needs will be provided, advisers should explain the potential limitations and risks of not receiving full advice to the customer; and
- Customers' options on paying for advice – a significant number of mystery shopped firms claiming to be independent did not offer customers an option of paying a fee for advice, as required by FSA rules. In some cases where fees were offered, customers were being dissuaded from taking this option.
The FSA will now carry out further work specifically on firms' assessment of customer needs, on their communications to customers (suitability letters) and on their management information to monitor the quality of advice being given. In the autumn the FSA will be running a series of workshops to help advisers improve their T&C regimes. In due course, it will revisit its thematic work in the financial advice area to check that the necessary improvements have been made and, in the meantime, will follow-up the most significant shortcomings with the individual firms concerned.
This work is part of a programme the FSA is undertaking into advice practices in the financial services industry, particularly in relation to complex products. The results of the work on critical illness were published on 30 May and in the coming months the FSA will publish the findings from its second stage of work on PPI and equity release and will explain its findings and future work programme in this area.
Quotes for use:
Stephen Bland, leader of the Retail Intermediaries Sector said:
"Our work was focussed on the way in which advice was given rather than whether the advice itself was correct. We wanted to drill down into the process, for the first time in such a systematic way, and identify the factors that can lead to customers being badly advised or mis-sold.
"Getting the advice process right is key to ensuring that customers are treated fairly. I hope that the additional information we are publishing will provide a helping hand to firms in addressing any failings they may have and, in particular, encourage senior management to focus on their responsibility to embed the Treating Customers Fairly principle throughout their businesses."
Notes for editors
- "Treating Customers Fairly" (TCF) is one of the FSA’s eleven Principles for Businesses and states that "a firm must pay due regard to the interests of its customers and treat them fairly".
- The findings of the FSA's work on the quality of advice process, case studies and a toolkit for small firms are available on the TCF pages.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.