With the FSB reporting period for most FSPs reaching a close, this is as good a time as any to reflect on the findings and learnings from the first six months of 2015.
By far the overall majority of FSPs which were visited in 2015 fell into a lower risk category based on the weightings applied. This is encouraging and we would like to commend those Key Individuals and FSPs who are committed to a culture of compliance and fair treatment of their clients as this serves the regulator’s objectives of improved customer confidence, the supply of appropriate products and services and enhanced transparency and discipline in the industry.
However, one cannot ignore those areas where there were instances of non-compliance as this undoubtedly exposes FSPs to the risk of regulatory sanction or may be cause for concern in the event of a client complaint lodged at the office of the FAIS Ombud.
There are three main areas in the operational processes which we would like to highlight as risks to FSPs where adequate control measures have not been implemented.
Monitoring of Representatives
In quarter one we focused on the duties and responsibilities of Key Individuals. It is the Key Individual/s who is responsible to ensure that any Representative who has been appointed to act on behalf of the FSP adheres to the General Code of Conduct. We found that in some cases there was not enough evidence that the activities of the Representatives, whether under supervision or not, had been monitored or that the requisite agreements or supervision plans had been adequately implemented. There were also cases where the training records of the Representatives had not been kept up-to-date.
The FAIS Ombud Determination in the case of Tshitema & Std Bank of SA Ltd is a stark reminder of how inadequate controls can lead to unfair outcomes for customers. The Bank was found in breach of Clause 11 of the General Code as there was a lack of proper systems to prevent theft, fraud and dishonest acts of its employee, the supervision was inadequate in ensuring compliance and the supervisor had failed to pay close attention to someone working under supervision and therefore exposed the Bank’s clients to potential prejudice.
This highlights the importance of making sure that you are able to demonstrate how you manage and monitor the activities of those authorised to act for the FSP to reduce the risk both to clients and the FSP itself.
Ensuring that clients are provided with relevant information about their product/s is a requirement set out in the General Code of Conduct. However, taking this further, one of the principles of Treating Customers Fairly requires that clients are provided with products which will perform as firms have led them to expect and that the service is of an acceptable standard. In our view, making sure that a product continues to perform in line with a client’s expectation also means understanding any changes to the circumstances of a client.
Not every client is able to take up all the products and services which they may need in order to achieve their financial goals and objectives at the outset, but re-evaluating their circumstances and their financial plan on at least an annual basis will enable an advisor to help clients move closer to achieving their dreams. Further to this, with the proposals set out in the Retail Distribution Review discussion document it will become more important to demonstrate the value which is offered to a client on an ongoing basis.
Attending to remedial actions set out in the Risk Management Plan
Risk management is a critical part of business ownership or management. Understanding those risks which could hinder the business from achieving its goals and taking action to avoid or reduce such risks is an important part of building sustainability. We found that there were some FSPs who did not attend to the actions which were set out in their Risk Management Plans.
This will continue to be a focus into quarter three and we would encourage you to attend the compliance workshops. Your compliance officer will be able to provide you with details of this in due course.
For us there are two distinct areas where FSPs should focus their attention when it comes to engaging with clients. Firstly, in respect of a needs analysis and secondly, where one financial product is replaced with another. We have seen an increased focus by the FSB, particularly during the FSB Compliance Reporting period where some FSPs have been asked to provide the FSB with steps which will be taken to either reduce or completely eliminate those transactions where no analysis has been done. We have also seen the FAIS Ombud requesting very specific information from advisors in the case of client complaints where it has been clearly requested that information which was recorded at the time of the transaction and the process followed to conclude that a certain product was suitable to the client’s needs and objectives be provided. No post facto account of what took place is acceptable. This area will also become more important where fees are charged by advisors for the work done in assessing the need of a client in order to provide a suitable recommendation.
From experience, we have seen that the cost of non-compliance can be hefty in respect of penalties or enforcements issued by the FSB or FAIS Ombud. In addition, one cannot ignore the cost of time, energy and stress which is wasted when compliance is lacking.
Having the right systems, processes and procedures in place together with controls to monitor and review these on an ongoing basis will ensure that the business can remain on track to meet its objectives and to ensure that the clients whom it serves are treated with fairness.