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6 key suitability issues in the advised sales process

Joanne Smith, chief executive of The Consulting Consortium and RecordSure highlights six key areas that adviser firms need to consider when evidencing suitability in the sales process

A continuing area of concern, for both the regulator and firms, is that there continues to be a problem with evidencing suitability, particularly relating to poor recordkeeping, across the majority of sectors and products. Some may believe continuing uncovering of suitability failings is simply a legacy of a more relaxed regulatory past or the regulator applying retrospective regulation. However, compliance consultants still uncover issues during periodic file checking and it is clear that evidencing suitability remains an issue today.

The sales function is also an area that carries high risk exposure, often from unsuitability. Placing a significant proportion of compliance time and resources on monitoring this business area, therefore, is essential for the management and prevention of this risk.

Consumer-centric culture

Firms should ensure that their culture is aligned to providing good consumer outcomes and treating customers fairly and that this is driven and delivered throughout the sales process and customer journey. Understanding how a firm’s board and/or executive team are involved in the planning and strategy process is a fundamental part of the FCA’s assessment process, resulting from the regulator’s conviction that culture drives conduct and that a business’s culture is set by senior management behaviour and actions. A firm that has its customers at the heart of its culture is more likely to recommend suitable products and services that meet the needs of the customer, rather than solely the commercial objectives of the business.

Sales practice assessment

In an assessment of sales practices the regulator may look at the following six areas. It would therefore be wise for firms to review these areas to ensure they will stand up to regulatory scrutiny:

1. Governance

A firm should have effective governance over how products and services are designed, marketed and distributed. The regulator will want to ensure that senior management has visibility of accurate and quality management information that will enable them to promptly address a range of emerging issues relating to suitability. Firms must also have a robust risk-based quality assurance process in place that ensures that a proportion of sales can be scrutinised.

2. Consumer strategy & sales process

The regulator will assess whether the firm’s sales objectives and strategies are high-risk, e.g. are they purely commercial and profit driven, rather than catering to the needs of a particular target market or niche? A firm’s proposition should be designed with customers in mind, ensuring that services and charges genuinely deliver value.

3. Rewards, incentives and performance management

Firms should consider how the delivery of the sales strategy is managed through its performance and reward schemes, ensuring that sales staff and advisers are not negatively influenced to recommend unsuitable products and services. Schemes should encourage and reward good conduct and the provision of good consumer outcomes.

4. Distribution

Distribution strategies will be subject to FCA review to ensure they are appropriate for the product and assess whether a firm markets and sells its products and services to a clearly defined target market. The regulator will want to see that the firm understands the wants and needs of its target market and distributes through the most appropriate and effective channels. This is particularly important where complex products are involved and has commonly been a contributor to these products being mis-sold in the past. With this in mind, firms should also have measures in place to mitigate the risks associated with the incorrect target market being attracted and sold to.

5. Recruitment, training and competence

The FCA will assess how effective a firm’s recruitment and on-boarding procedures are for ensuring that new staff, whatever their job role, are aware of their obligations, are fit and proper, and have the correct skills and knowledge to ensure customers are consistently receiving fair outcomes. A firm should have a mechanism for ongoing monitoring to identify and efficiently address competence gaps and development needs, continually improving the levels of staff competence. The FCA will assess whether sales staff carry out principle 6: treating customers fairly and principle 7: communicating in a way that is clear, fair and not-misleading.

6. Controls

Sales data, sales processes and complaints should be monitored to identify, manage and mitigate conduct risk, common failings and any emerging customer detriment. Firms that record and review the conversations between their advisers and their customers will be in a better position to be able to monitor the suitability and compliance of their sales process, therefore mitigating risks. Those firms that are then able to mine these conversations for common or often occurring data can find out insights about their business that will enable them to strengthen the sales process and better train advisers.

It is a key challenge for firms that have consolidated or acquired other businesses to apply a consistent approach to compliance. Ensuring consistency across key areas such as reporting and management information (MI) should be a key focus and will enable senior management to identify trends and make decisions to mitigate key risks, such as suitability. Taking advantage of the recording and analysis of conversations can enable firms to apply a consistent approach to their compliance monitoring.

With an understanding of where the FCA may assess sales practices, firms can review, identify shortfalls and weaknesses, and put in place remedial measures before a regulatory visit. Reducing mis-selling through unsuitability and rebuilding consumer trust is at the core of the FCA’s agenda, so firms should ensure they focus on ensuring suitability can be achieved and evidenced through sales practices and effective monitoring.

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