Streamlined Advice: An introduction
Bu Miquee McCrindle: Compliance Consultant at RiskSave Technologies
FCA Guidance on the Financial Advice Market Review; Part 1 of 3
In 2015, the Financial Conduct Authority (FCA) and HM Treasury teamed up to find ways in which the Government, the industry and regulators could encourage the development of a market which delivers affordable and accessible financial advice and guidance to everyone. This was done through the Financial Advice Market Review (FAMR). The final report by the FAMR was published in 2016, and made a number of recommendations for the FCA, other regulators and HM Treasury to review. This series will go through the FCA finalised guidance in 3 parts.
Here in part one we will be looking at the different aspects of “streamlined advice” services, plus the FCA guidance on these services. Streamlined Advice According to the FAMR is – ‘A term used to collectively describe advisory services (such as focused and simplified advice) that provide a personal recommendation that is limited to one or more of a client’s specific needs. The service does not involve analysis of the client’s circumstances that are not directly relevant to those needs.’ The principles in the guidance paper apply to both focused as well as simplified advice services. The regulator is looking for firms to have well- designed processes and governance in place which focus on the needs of the firm’s clients, as they believe these streamlined advice services are more likely to deliver good outcomes for the firm’s clients (as well as adhering to FCA rules).
Some important areas to consider when designing streamlined advice services are:
(and RiskSave can help with these)
Identifying the target market – Early consideration of the type of client the firms service will be aimed at allows an early indication of what the needs of those identified clients will be and how the firm can deliver an outcome that will address those needs. Additionally, this will help the firm identify the scope of the service, select products that are potentially capable of meeting the needs of the relevant clients and take appropriate steps at an early stage to filter out clients who are unlikely to have their needs met.
As one can see, the “needs” of the identified clientele are a main focus for the FCA, and should be a main focus of any in scope firm. By identifying the target market early and accurately, it allows the firm to ensure it has the type of client whose needs and objectives were in mind, rather than clients whose needs and objectives will not be met. Upon reviewing the needs and objectives of the target market (for the specific products), if the needs and objectives do not match those of the clients to whom the firm intends to promote its streamlined advice service to, then these products should not be offered through such a service. The FCA advises firms to use a filtering process in the form of a flow chart, decision trees or drop down lists, etc, in order to determine and ‘filter out’ at the start of the advice process those clients whose needs, characteristics and objectives would not be compatible with the particular products on offer or for whom a streamlined advice service would not be appropriate. The ongoing monitoring of the use of the services – The FCA requires firms to have a system in place to continuously monitor who is using the streamlined service, and make sure the firm takes the necessary action should a customer/s start receiving unsuitable personal advice. The design of the client interface – The FCA emphasises that the mode of distribution/communication with the client does not alter the suitability requirement for firms when recommending to clients any services or financial products. It must be a suitable recommendation!
When designing the client interface the firm should start by considering the nature and characteristics of the target market (intended clients) for their streamlined advice service. Who is the client? This will include looking at a number of factors including; the clients likely level of financial knowledge and experience and whether the interface is clear and comprehensible. The firm should use this to determine the type and variety of questions they ask and the supporting information they will need to provide to the clients.
Support from staff – The FCA ( and MiFID) requires firms to employ people with the necessary skills, knowledge and expertise in order to effectively complete the work and responsibilities allocated to them. This means that if an employee is responsible for giving personal recommendations, they must have the knowledge and competence required to properly provide a personal recommendation (this may require the employee gaining appropriate qualifications where necessary). Consequently, staff members who are not suitably qualified must never provide personal recommendations, and firms are required to ensure that they have sufficiently robust risk management controls in place to guarantee that a personal recommendation is only provided by a member of staff who is suitably qualified to do so. Therefore, it is crucial that the individual member of staffs role, in terms of what they can and cannot do, must be clear to the firm and the staff member. The member of staffs role should also be clearly explained to the client when the firm describes the nature of its services.
Disclosing the nature of the services – You are required to disclose the nature of the streamlined service being offered. When disclosing this information, it must be in a clear and comprehensible form (Principle 6: fair, clear and not misleading) so that the client can understand the nature and risks of the service and of the specific type of designated investment that is being offered and, consequently, to be able to, on an informed basis, make investment choices. While taking the information needs of the client into account, the firm must provide this information in good time, enabling the client to make an informed decision on how to proceed.
Client information and suitability – High level suitability rules still apply. An advice firm must acquire the necessary information regarding the clients: knowledge and experience in the investment field relevant to the specific type of financial instrument or service; financial situation (importantly, the client’s ability to bear losses); and investment objectives, including the client’s risk tolerance. In a streamlined advice service, the rules allow for a firm to collect only the level of information proportionate to the client, and the products and services they offer, or on which the client requests specific investment advice. A firm is required to acquire this information because they will need to be able to recommend or make a decision to trade products or services which need to be suitable for that client. In order to comply with the above, the firm will need to obtain the information that will be necessary to understand the certain facts about the client that are essential in order to have a reasonable basis for determining that the specific product/service to be recommended meets the client’s investment objectives, including, amongst others, the client’s risk tolerance.
Streamlined advice – when designing a short customer journey it is important to collect proportionate levels of information – As mentioned previously, streamlined advice service rules stipulate information may be obtained that is proportionate to the client. However, firms are not allowed to lower the overall level of protection due to clients, this is likely to require the firm to consider a number of factors, including the client’s level of indebtedness (credit card debt etc) and access to cash meet an emergency (amongst other things). While firms collect such information, they may determine that a specific client does not match the suitability requirement. If this is the case, the firm should not recommend a service or product to the client.
Relying on information – A firm can rely on information given by the client, unless it is clear that the information given is manifestly out of date, inaccurate or incomplete. It is advisable that firms ask clients to verify that the information they have given is correct. Firms may already have a large amount of information about a client on record, the firm will only need to take into consideration the information it needs in order for it to provide a suitable personal recommendation to the client. It may therefore, not need to take all the information it has on a client into account. However, a firm must never recommend investment services or financial instruments to a client until it is satisfied that it has enough information to make a suitable recommendation.
Considering existing investments – As part of its suitability obligations, the firm will need to determine what information is needed from the client in order to provide suitable advice in any given scenario. For example, if existing investment information is needed to determine suitability for a client, then information on the clients existing information should be obtained. If the client refuses to supply necessary information the firm must not make a recommendation.
Asking clients to ‘self-assess’ suitability – Suitability is a core element of providing a personal recommendation, and firms should treat it as such. The suitability assessment is a firm’s responsibility. Firms should not rely on clients to ‘self-assess’ their circumstances by asking subjective questions such as whether clients have ‘sufficient’ knowledge and experience or ‘significant’ levels of debt, etc.
Risk profiling – Information about a client’s investment objectives must include all relevant information, for example: The length of time for which the client wishes to hold the investment; their risk profile; and the purposes of the investment. The firm must ensure they establish the risk a client is willing and able to take with their money. This is a key part of the suitability assessment and will help ensure the firm makes suitable personal recommendations to clients.
Some key areas a firm should keep in mind when assessing risk profiles are:
i) The clients capacity for loss;
ii) the design of the risk profile questions (eg are they clear and not misleading?); are there any poorly worded risk descriptions?;
iii) does the firm have an inappropriate approach to scoring question answers? Even when the firm uses a third-party risk-profiling system, the firm is ultimately responsible for ensuring that their personal recommendations are suitable.
How can RiskSave help? If you would like to understand how these rules affect your business please contact us at RiskSave by pressing the button below. Please also keep an eye out for part 2 and 3 of this series.