We are often asked what a good file looks like, as people are keen to ensure their records are compliant and contain everything needed. While there is no definitive answer because content varies between files, in general the more detail the better.
Here are some examples of good and poor practice, including an overview of key areas.
Accepting customers
Good practice:
- A copy of the full client agreement, service proposition (where relevant) and customer privacy notice on file, signed by the client
- Clear disclosure of the firm’s scope of service and charges.
Poor practice:
- Disclosure documents not signed or dated
- Missing documents, no reference to the customer privacy notice on file
- Adviser charges above those laid out in the agreement. (The FCA does not look favourably upon this and firms should reconsider the content of client agreements if they don’t work in practice.)
Know your customer
Good practice:
- Fully completed fact-find
- Sufficient hard and soft facts about the client to clearly demonstrate the firm knows its client
- Clearly identified objectives using the client’s own words. What does the client want, either now or in the future? Why did they approach you for advice?
- Additional notes providing a summary of the meeting. Tell the story and build the picture for the file. Not only will this help with any third-party (potentially FCA) file reviews, it could help defend potential future complaints.
Poor practice:
- Missing or inconsistent information. Often advisers know the client well but haven’t recorded the information correctly
- Blank sections. When a section of the fact-find has not been completed, it’s hard to know if it has been missed or is not applicable to the client
- Lack of detail in the fact-find
- Some fact-finds are too focused on the solution without demonstrating the background.
Investment process
Good practice:
- A fully completed risk profile report that details the client’s attitude to risk and capacity for loss
- Additional notes to clarify the discussions with the client on risk
- Relating capacity for loss to the client’s personal circumstances.
Poor practice:
- Inconsistent attitude to risk and capacity for loss. Is the client taking a higher risk than they can afford?
- Inconsistent answers to the risk profile questionnaire that haven’t been queried. This could be due to a lack of understanding but could also be a sign the risk profile result is inaccurate
- Ethical investing not explored.
Research, literature and product disclosure
Good practice:
- Research on file that supports the recommended product and provider
- Fully completed application form, dated after the suitability report, which accurately reflects the recommendation and client’s circumstances
- An illustration on file that accurately reflects the recommendation.
Poor practice:
- Files where the research included does not support the recommended product or provider. That being the case, we would expect the firm to provide additional notes or commentary to explain why this is the most suitable recommendation for the client
- Inaccurate client details on the application form or illustration could lead to the wrong product being recommended or a misrepresentation to the client.
Suitability report
Good practice:
- A suitability report on file for all cases, even when it is not technically required by the FCA (for example, mortgage cases)
- Use the client’s own words when providing a summary of their objectives in the suitability report
- Personalising the report. Standard wording and templates can be a useful aide memoire. However, removing irrelevant sections will help the report to flow better and make it more concise.
Poor practice:
- Incorrect client information. If reports are built on a template, which is often the case, it is not unusual for advisers to miss some necessary amendments and include information for the wrong client. This looks unprofessional and could lead to confusion, which results in an unclear grading
- Too lengthy. Suitability reports should be as concise as possible. If they are too long, the client could be put off reading them
- Non-personalised. While templates have their benefits, it’s important that key parts of the report are personalised. This not only makes it easier to read but, again, could help with the defence against a potential future complaint.
Mark Greenwood is director of compliance services at The SimplyBiz Group
Ah yes, the age old chestnut of concise SR’s. The almost IMPOSSIBLE challenge is to strike an acceptable balance between ticking all the boxes (so as to make the SR as bomb-proof as possible against future challenge) and making it short enough to be readable.
If, having been through it with a fine-toothed comb, a predatory CMC can find absolutely nothing incorrect, missing or unclear, there’s always the handy fall back that the SR was simply too long and convoluted for any mere mortal to comprehend, therefore the recommendation was unsuitable by virtue of being excessively complex.
The ONLY solution is TWO SR’s, the second one being a bullet point summary of the key points of the main one, cross-referenced to the full text. Which, of course, ratchets up the cost of the whole process. And, of course, there’s the requirement to reaffirm suitability at least once a year, even if there’s been no change whatsoever to the client’s circumstances and objectives. It’s all gone crazy.
I agree with what Mark Greenwood says about templates and standardised impersonal content in suitability letters, but I disagree with him on the subject of ‘signed’ client agreements.
A client agreement is fully enforceable in law if is issued to a client in advance of any services being provided, for which a charge will be made. It must be clear that the terms of the ‘client agreement’ are those on which such services are being provided. Neither the law nor the FCA require ‘signed client agreements’. It is not therefore ‘poor practice’ not to have them signed.
Much worse to issue a virtually incomprehensible 15 page agreement and then expect a client to sign it as an act of submission. The FCA has ensured such agreements have become far too complicated as firms seek to insulate themselves from every conceivable risk. Having an agreement ‘signed’, proves nothing more than that it was issued/received and there are other ways of achieving that more efficiently. A defective agreement will remain defective, whether a client signs it or otherwise.
If it’s not signed, proving that it was ever issued could be difficult. A complainant could claim that it was just waved under his nose but that he wasn’t actually given it, taken through it or even advised to read it.
Still better to get it signed. Makes it less likely that it will be subsequently disputed.
If it is disputed, then ‘this is your signature Mr customer’
On the issue of the best length of a Suitability Report, clearly you can’t have a hard and fast rule.
IMO, best to keep it short focusing on the key points. You can always make reference to other documents.
IMO, anything over say 20 pages and the customers eyes will glaze over.
On another point, methods of assessing ATR which I have come across were based on taking a weighted average of the answers to a series of questions. In principle this makes sense. However, again IMO if it is scored say 1-6 and the answers range from Low Risk to Speculative it would be dangerous to record the customer as Balanced. Seems more likely that the customer did not understand the questions.