Central to the Financial Advisory and Intermediary Services (“FAIS”) Act and the Retail Distribution Review (“RDR”) is quality and suitable advice to clients. In this article we look at how some of the main proposed amendments to the FAIS General Code of Conduct published for consultation in November 2017 will impact an advisor’s advice process.
Acting honestly, fairly, and with due diligence
The (wider) proposals will require advisors to act honestly, fairly and with due diligence at all times, instead of just while rendering financial services.
Advisors have a fiduciary responsibility and will need to think about ethics in every situation to avoid breaching this requirement. To ensure your processes are ready for this change, consider ethics training for staff, and a bi-annual FAIS Declaration for representatives.
Gathering of information
An important step in the advice process is the gathering of information. Without clear goals and accurate financial information, a meaningful plan is not possible.
Currently a provider must, prior to providing a client with advice, take reasonable steps to seek from the client appropriate and available information regarding the client’s financial situation, financial product experience, and objectives to enable the provider to provide the client with appropriate advice.
The proposal requires an advisor to do more than just take reasonable steps to gather this information and ensure suitable advice. Advisors will also need to gather information on a client’s risk profile, financial product knowledge and experience, and will need to consider whether a client has the necessary experience and knowledge to appreciate the risks, and whether the client can afford any costs or risks attached to the product. For corporate clients such as pension funds or medical schemes or employers, advisors will also need to consider not only the needs of that entity, but also the reasonably identified needs or circumstances of the underlying members, or employees, or natural persons employed by that entity.
To ensure your process is ready, consider how you gather data, what forms you use to support and document this process, and the questions you need to ask to understand a client’s risk profile, financial product knowledge and experience, and affordability. In anticipation of the changes, start making changes to your process where this is needed.
Currently, prior to providing a client with advice, an advisor must identify the financial product(s) that will be appropriate to the client’s risk profile and financial needs, subject to any limitations under law or any contractual arrangement. The FSCA is concerned about the risk of advisors recommending a potentially unsuitable product to “make a sale” where a provider is legally or contractually limited in relation to the range of products or product suppliers it can offer.
The proposal will require an advisor to make it clear to a client where it is not possible to identify a product(s) that will be appropriate to a client’s risk profile and financial needs due to such limitations (e.g. where an advisor is not accredited for a certain product or only has an agreement with one product supplier). In addition, an advisor must decline to recommend a product or transaction and suggest the client seeks advice from another appropriately authorised provider.
To ensure your process is ready, consider your current product supplier agreements, identify possible gaps in your product offering, and ensure that your process includes a check to flag and document in writing instances where another product would be more suitable and decline to make a recommendation.
Limitations to advice
In terms of the Code, advisors must conduct an analysis of a client’s situation, needs and objectives, based on information obtained before providing advice.
Currently, it is possible for an analysis not to be undertaken where a client either had insufficient time in light of surrounding circumstances or did not provide all the information requested. The FSCA is concerned that advisors are using s8(4) declarations (whereby a client attests that he or she understands that a full analysis could not be undertaken, that there may be limitations on the appropriateness of the advice, and that the client should take care to consider on their own whether the advice is appropriate, considering their objectives, financial situation, and particular needs), to avoid a full analysis.
The proposal specifies what an advisor may take into account in determining the amount of information necessary to provide appropriate advice. This includes specific objectives or needs which either the client has explicitly requested be included or excluded, or which the client and advisor have together agreed will or won’t be focussed on. Also included are instances where surrounding circumstances make it clear the client can only reasonably expect the analysis to focus on specific objectives or financial needs, or where the client has explicitly declined to provide any information requested. Clients must be informed as soon as possible that there may be limitations on the appropriateness of the advice provided, and the client should take particular care on their own to consider if the advice is appropriate considering their objectives, financial situation, and aspects not considered.
To ensure your process is ready, ensure your records of advice are detailed, in plain language, and make specific reference (in addition to a warning regarding the limitations and need to consider if the advice is appropriate), to what the client explicitly requested be included or excluded, the role of surrounding circumstances in determining what should be focused on, and any information which the client explicitly declined to furnish. Going forward, the FSCA may determine the format and content of a record of advice and may give guidance or instructions.
In line with the RDR proposals relating to commission on risk policies, a definition for “replacements” (in addition to the definition in the Policyholder Protection Rules) is proposed. The definition aims to clarify which type of transactions (including variations) of financial products constitute a replacement and includes RA transfers.
The FSCA has recently published a draft Replacement Advice Record for individual risk policies. Identification of replacements should form part of the advice process and the relevant replacement advice records completed. The reason for a replacement and the difference between the old and new product should be clearly documented.
It is critical that advisors scrutinise their end-to-end advice process, think about how it may need to be revised, and plan accordingly. The goal should not only be compliance and protection against complaints, but an advice-led process with the client at the forefront.