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Where customers receive advice, the advice is suitable and takes account of their circumstances.

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Principle 4: Suitable advice

 

What that means:

 

In the past, companies have found themselves in a spot of bother over the advice given to their customers.

 

This does not just concern things such as loans; it can also relate to insurance and pension funds. It goes without saying that when taking advice on such important issues such as your pension that you must get the best possible advice relevant to your specific circumstances.

 

This simple principle from the FSCA covers a whole world of hurt if it is not adhered to by companies. So that’s good news!

Outcome 4 focuses on client engagement, (not advice only), and places several obligations on FSP, advisors and support staff. A lot of what you find in this outcome is addressed through being properly compliant with fit and proper, and the general code of conduct.

 

Firstly, there must be a robust process to ensure that good advisers and support are recruited and developed.

Part of the changes to Fit and Proper now require FSP’s to assess at appointment, as well as on an ongoing basis, the competency of advisors in respect of technical and product knowledge and skill and a culture fit. This means that controls are being implemented where FSP’s must ensure that their people stay up to scratch.

 

Qualifications and experience that advisers have must be appropriate for the service provided to customers, and there must be a mechanism in place to identify gaps in skills and knowledge.

 

These will have to be addressed through training or performance management and keeping knowledge and skills up to date is now a regulatory requirement.

 

A training and competency plan that is followed and reviewed regularly, is required in terms of the new Fit and Proper and full details are required to be uploaded onto a regulatory competency register every year.

 

Persons who are inadequately trained, or who do not take sufficient time or care in delivering a service, could result in customers feeling deceived and move their business elsewhere.

 

Delivering suitable advice is a key component of TCF as well as the General Code of Conduct. Where customers have obtained a recommendation, the advice must reflect their needs, priorities, and circumstances.

 

Meeting TCF outcome 4 is a direct responsibility of representatives, although FSP’s must have procedures in place to ensure that representatives giving advice are adequately equipped to do so, must monitor advice given and rectify any behaviour that does not comply with the stipulations under TCF outcome 4.

 

A key component of suitable advice is having the relevant skills and processes in place to provide such advice for the target market and product concerned. Therefore, an FSP must before deciding to market a product, assess whether or not it has the appropriate skills and processes in place to provide advice that will be suitable. The FSP must also have clear agreements with any third parties distributing products on behalf of the financial services provide, setting out respective responsibilities in relation to providing customers with advice, information, and service support. These agreements must be structured to ensure that customers understand who they should look to in relation to different aspects of the financial products or services provided to them.

 

The other main responsibilities of FSP’s under TCF outcome 4 are ensuring that representatives providing advice is adequately trained and monitoring advice given.

 

The FSP must be able to provide concrete examples, supported by management information, of improvement in the extent to which they are delivering TCF Outcome 4 to customers.

 

Financial service providers must ensure that representatives have adequate knowledge of products and services on which advise is based to enable the representatives to provide suitable advice on those products. The financial services provider (as a product supplier) must provide adequate training and the financial services provider must monitor the quality of training, training attendance and assess whether knowledge has been adequately retained by representatives.

 

It is also imperative that the FSP have controls in place to prevent representatives providing advice on products if they do not have adequate product training. Feedback and complaints must be monitored to identify any training needs and the risk of inappropriate advice.

 

The financial services provider must have clear TCF objectives included in the criteria that representatives are required to satisfy to meet incentive or remuneration targets, regardless of whether the remuneration or incentive is determined by the FSP or another third party.

 

Over and above monitoring feedback and complaints, FSP’s must also monitor other potential TCF indicators in relation to customers associated with third parties and representatives to identify and mitigate risk of inappropriate advice or poor customer outcomes attributable to the third parties or representatives concerned.

 

These TCF indicators may include the following:

 

• Claims
• Product retention or early termination
• Investment portfolio
• Type and frequency of product

 

Third parties (for example funeral houses) and representatives should be encouraged to provide management with feedback about aspects of their products or services that hinder their ability to provide suitable advice.

 

Management must ensure that third parties and representatives are aware of what products he or she is able to provide advice on, based on the categories for which the representative is authorised for and any limitations imposed on the license of the financial services provider to which the third party or representative is contracted.

 

The financial services provider must also have controls to identify and act on instances where representatives have provided advice, they were not authorised to provide, either in terms of their specific contract or mandate with the financial services provider and/or with any product supplier, or as a result of non-compliance with the FAIS license conditions or other legal requirements.

 

Policies and procedures must be in place to compensate customers who have suffered financial prejudiced as a result of inappropriate advice.

 

Representatives that continuously provide unsuitable advice, or if a single transgression is of a serious nature, must be subject to disciplinary procedures and removed from role as representative if necessary.

 

It is also advisable that FSP’s monitor published decisions of the FAIS Ombuds, guidance from the FSCA and other relevant information sources in relation to advice practices, to ensure that the controls and practices in relation to TCF outcome 4 remain relevant and effective.

 

The elements of advice

For representatives to give suitable advice they must maintain adequate product knowledge, do a suitable needs analysis, maintain a record of advice, and manage conflict of interests.

 

Product knowledge

 

Adequate knowledge is key to providing suitable advice to customers that suit their needs and risk profile.

 

Managements must ensure that representatives are aware of the arrangements made for access to any product information necessary to provide suitable advice.

 

Management should ensure that a representative do not recommend a product if they do not understand the product completely.

 

Needs analysis

 

Management must ensure that products recommended to a customer is suitable to the customer’s needs. The General Code of Conduct describes that a representative must follow the following procedure when advising a customer:

 

• The representative must ask the customer questions relating to the customer’s financial situation, financial product experience and objectives. This will enable the representative to provide the customer with suitable advice
• The representative must establish the needs of the customer based on the information obtained from the customer
• The representative must identify the financial product that will suit the customer’s needs, subject to legal or contractual limitations imposed on the financial services provider
• The representative must establish whether the financial product identified is a replacement for an existing financial product of the customer
• If the product is a replacement for an existing product, the representative must fully disclose to the customer the financial implications, costs, and consequences of such a replacement
• The representative must ensure that the customer understands the advice and will be able to make an informed decision

 

If a customer chooses a different product than the one recommended by the representative or do not follow the advice, the representative must inform the customer of the risk that the product might not suit the needs of the customer.

 

If the customer does not want to provide the representative with the requested information, the representative must inform the customer that the advice given might not be suitable to the customer’s needs, objectives, and financial circumstances.

 

Record of advice

 

A financial services provider must maintain a record of advice if a financial product is purchased because of advice given. The record must contain the following:

 

• A summary of the information and material on which advice was based
• The financial products which were considered
• The financial product or products recommended with an explanation of why the products selected will meet the needs of the customer

The representative must provide the customer with a copy of the record of advice in writing.

 

A conflict of interest is any situation in which the representative has an interest that may influence the objective advice giving of the representative. For example, a product supplier may offer a price for the representative selling the most of his products. This might lead the representative to advice customers to buy the product so that he/ she can win the competition.

 

FSP’s must adopt, maintain, and implement a conflict-of-interest management policy that complies with the provisions of the FAIS Act. The policy must contain measures for the identification and address of any conflict of interest there may be between a financial services provider, representative, product supplier and customer.

 

The financial services provider must, in writing, at the earliest reasonable opportunity disclose to the client any conflict of interest of respect of the client, including the following:

 

• The measures taken, in accordance with conflict-of-interest management policy to avoid or mitigate the conflict
• Any ownership interest or financial interest, other than an immaterial financial interest, that the third party or representative may be or become eligible for
• The nature of any relationship or arrangement with a third party that gives rise to a conflict of interest, in sufficient detail to a client to enable the client to understand the exact nature of the relationship or arrangement and the conflict of interest

 

A financial services provider or representative must, in writing, at the earliest reasonable opportunity inform the client of the conflict-of-interest management policy and how it may be accessed.

 

Do you comply with any contractual obligation, for example periodic reviews – review records and diary system and SLA.

 

Review products and services where performance may vary materially – review records and provider feedback.

 

Communicate contractual ‘breakpoints’ such as the end of a long tie-in period that may have a material impact that the customer cannot reasonably be expected to recall or know about already.

 

Examples of how this can be evidenced includes:

• Product supplier feedback
• Claims
• Cancellation statistics
• Complaints statistics