Part 2: FCA’s ongoing advice services review: the next steps for wealth managers

Part two of TCC’s webinar continued the house view on the FCA’s ongoing advice review findings for wealth managers. Recordsure’s Chief Product and Chief Commercial Officer, Garry Evans, was joined by TCC regulatory experts Gary Maude and David Boyhan.

The second instalment focused on the evidence and next steps wealth managers should consider to meet regulatory expectations.

Garry Evans

Garry said evidence appears to be the keyword when considering what the FCA is looking for under Consumer Duty. He asked whether firms were confident they had evidence to categorise clients into three groups for each service review period back to the start of 2018: clients who received a substantive review, clients who were offered a review but declined or did not engage, and clients who were not offered a review.

He also asked what evidence firms would use to determine the category for each client and each service period. He noted that over 60% of respondents who answered said they had proper evidence, and asked Gary Maude and David Boyhan to set out TCC’s view on the evidence required and the actions wealth managers should take once clients had been categorised.

Garry described the poll as a way to understand whether firms were using documents, practice management system data, something else, or had no evidence at all. He used the responses as a lead into the detailed discussion of what evidence should be required.

Garry said that, along with the other changes Consumer Duty had brought, evidence appears to be the keyword. He wanted firms to say whether they could accurately categorise clients for each service review period and whether they were using documents, system data or other evidence.

He asked the panel to provide TCC’s house view on what evidence is required and what wealth managers need to do once they have identified which category individual clients fall into for each period back to 2018.

David Boyhan

David said firms need to undertake two pieces of work: a backwards-looking piece and a forward-looking piece. He concentrated on the backwards-looking work and said the FCA expected it to go back to January 2018, when method two requirements came into play. For firms that received the FCA letter in February, he said the FCA had gone back to 2017 but had since been clear that firms only need to go back to 2018.

He explained the FCA’s three client groups: clients who received a review, clients who were offered a review but did not engage, and clients who were not engaged or were not invited to engage.

For a completed review, TCC’s view is that the minimum evidence should include updated KYC. That might be a note from the relevant advice period saying the client confirmed there were no changes, or evidence of changed circumstances. David also said firms need a report letter confirming ongoing suitability.

For clients invited to engage who did not engage, which the FCA put at about 15%, TCC’s view is that documented evidence of the invitation is needed. An email from 2018 or 2019 could show that the client was asked to engage, and chasers would be preferable, but David suggested at least one email as a minimum.

For clients with no records of contact or phone calls, he said they fall into the category where the client was not given the opportunity to engage. Firms should categorise clients annually, because a client may miss one review or may receive no reviews for five years in a row. That level of MI is needed so risk departments can decide what action to take for clients who missed one review compared with clients who missed four or five.

On the forward-looking piece, David said firms need to consider fair value assessments and ongoing advice processes for disengagement.

David described the completed-review bucket as the one every firm wants to be in, and noted that the FCA found the majority, over 80%, in that category. He said the other two buckets still matter because firms must determine where each client sits for each review period.

He said evidence should come from the relevant period of advice and should demonstrate whether the client’s circumstances had or had not changed. For disengaged clients, the evidence is more subjective, but firms still need a record that the client was invited to engage.

David stressed that annual categorisation matters because the impact of one missed review is different from four or five missed reviews. That MI then helps risk teams decide how to treat each client population.

David said the poll results were positive because the majority of respondents believed they had evidence, or at least some evidence, including fact finds and report letters. He then separated the work firms need to undertake into the backwards-looking review and the forward-looking expectations following the FCA’s report.

He said the FCA grouped clients into three distinct areas. The first group had received a review. The second had been offered a review but did not engage. The third had not been engaged or invited to engage. When firms go back to 2018, they need to place clients into those categories for each service period.

For clients who had not engaged, David said the documented invitation could be an email from 2018 or 2019. For clients with no phone calls or other records of contact, the evidence points to them not having been given the opportunity to engage.

David said the easiest category is where there are no records of anybody being contacted and no phone calls. Those clients would fall into the bucket where the client was not given an opportunity to engage.

David said it was important to remember the FCA had produced findings from its report and that the backwards-looking piece was distinct from the forward-looking piece. He called the 2018 limit a positive point for firms that had previously received a letter going back to 2017.

Gary Maude

Gary said previous reviews such as TR241 were more prescriptive, but the current landscape allows more scope for missed appointments and taking a fee if circumstances have not changed. He returned to the evidence point and said TCC sees a common problem in Section 166, VREQ, assurance and audit work: advisers are not clear when putting together evidence of what advice has taken place.

He said firms often land on partial or unclear evidence, which affects later discussions about redress. Even where firms have done a lot of good work, they need to consider whether it matches their terms and conditions and whether it is enough to justify fees under fair value considerations.

Gary said the ripple effect is wide. Firms need to consider production and use of MI, evidence of challenge, senior management discharge of SMCR duties, board duties, root cause analysis, underlying trends, areas that look too good to be true, and adviser, branch or supervisor MI where there is a pattern of clients not needing advice.

He concluded that the issue touches conduct risk, systems and controls risk, corporate governance and SMCR.

Gary said firms can face contractual and fair value questions where the evidence does not exactly match what the client was told would happen. He said the issue could not be reduced to whether firms had done something or a lot of good things, because the question is whether that evidence is enough.

He also referred to challenge in management information: senior management and boards need to demonstrate that they considered root cause, trends and cases where results look too good to be true. Patterns involving advisers, branches or supervisors can indicate wider conduct risk.

Gary said the wider issue appears in general advice quality as well as ongoing advice, and that firms often need to demonstrate what advice has taken place. Where evidence is partial or unclear, firms can enter the realms of contractual consideration and fair value consideration.

He said this creates implications for redress and for senior management because there needs to be enough evidence of challenge. Firms should look at root cause analysis, underlying trends and MI for advisers, branches and supervisors where there is a history or pattern of clients not needing advice.

Gary reminded firms that, in practice, evidence can be partial, unclear or difficult to rely on. That creates a follow-up question: whether what has been done is exactly what the firm told the client it would do, and whether it is enough to justify the fees being paid.

Gary contrasted the current position with more prescriptive, black-and-white past reviews. He said the landscape is moving and there is some scope for missed appointments or fees where circumstances have not changed, but the evidence still needs to be clear.

He said the common problem is that advisers are not always clear, and firms therefore need clean evidence rather than partial records. The discussion brought together conduct risks, control risks, corporate governance and SMCR, so senior leaders should not assume everything is fine just because a process appears to have been undertaken.