Your IndustryJul 9 2015

Regulatory requirements for client-facing tools

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Regulations today are ‘principles-based’, rather than the previous prescriptive approach.

‘Suitability’ and ‘appropriateness’ are critical, and it is important that clients understand what the tools and the outputs produced by software are telling them. The Financial Conduct Authority – and predecessor the Financial Services Authority – has never produced stringent rules on what adviser back office technology and client-facing systems must deliver.

However, the FCA has pointed towards Treating Customers Fairly.

The FCA expects customers’ interests to be at the heart of how firms do business and for advisers to choose their back office support systems with this in mind.

The regulator wants six outcomes delivered for consumers but does not prescribe how advisers must go about achieving these goals.

The first outcome is that consumers should be confident they are dealing with firms where their fair treatment is important.

The second outcome is products and services marketed and sold should be designed to meet the needs of identified consumer groups and targeted accordingly.

The third outcome is consumers should be provided with clear information and kept appropriately informed before, during and after the point of sale.

The fourth outcome is where consumers receive advice, the advice must be suitable and take account of their circumstances.

The fifth outcome is consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.

The sixth outcome is consumers must not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

Treating Customers Fairly requirements also demand firms make use of suitable management information to monitor the outcomes they are achieving for customers.

This may comprise a range of information of different types, both numeric and descriptive, but it is important that it is forward-looking (enabling management to identify risks to customer outcomes rather than dealing only with known issues) and that it is acted upon when necessary.

Advisers also need to be aware of comments made by the regulator about risk profiling software.

An impact of the principles-based approach is that they can be open to interpretation: as demonstrated by the FCA review in 2011, which found that nine out 11 risk profiling tools had ‘weaknesses’.

Because there is room for interpretation in the regulations, and there is an obligation to protect clients, proper due diligence is critical – possibly with the assistance of an expert third party.

Simon Bussy, principal consultant of Altus Consulting, says any client-facing tools and outputs must meet all regulatory requirements, not least around suitability and appropriateness, and these must be clearly prominent and easy to understand.

He says: “The tools and outputs themselves should be part of a much wider client discussion which would include goals, needs, timescales, capacity for loss, volatility tolerance, and so on.

“The challenge for many businesses is to work with their compliance teams to find new and innovative ‘can do’ ways that will help the end customer better understand the results or forecasts produced by the tools and not hide behind a mountain of regulatory papers and just say “no” or “it can’t be done.”

“This is as much about the culture and attitude within an organisation as it is about the regulations themselves.”

Mr Bussy says the critical points for adviser firms are to:

• complete proper due diligence, perhaps with the help of an expert third party where necessary;

• really understand the weaknesses or limitations of the tools, as well as the benefits; and

• use the tools as part of an overall broader discussion with the client, not to take the answers as the ‘be all and end all’ in the advice process.

Nick Eatock, executive chairman of Intelliflo, says full due diligence should include understanding your own requirements and how they overlap with the software.

He says it is vital that advisers also understand the “art of the possible” from the software perspective.

Due diligence should cover security of software supplier from a data perspective and their financial due diligence, he adds.

Gary Shepherd, director of business development at Sprint Enterprise Technology Limited, says the main regulatory requirement is that data stored on any solution is hosted on UK servers.

He says advisers should be able to have instant access to all of their data at any time and their solutions should provide them with a complete audit trail of changes made and by whom.

There is a regulatory factor where adviser firms are ‘outsourcing’ the technology to a vendor, warns Mark Loosmore, UK executive general manager wealth at Iress, and he points out this is covered by SYSC 8 guidelines.

This serves to ensure that firms take reasonable steps to avoid undue operational risk and to facilitate compliance monitoring.

What this means for firms depends on whether they are defined by Prudential Regulation Authority regulation as a ‘common platform firm’ or not, says Mr Loosmore.

For the majority of adviser firms, Mr Loosmore says this will be the latter and therefore SYSC 8 will be guidance, rather than a rule.

Adviser firms would also be well-advised to undertake the kind of normal ‘due-diligence’ process that should be applied to working with any new supplier, such as looking at ownership, financial stability, competence, qualifications, and testimonials, he adds.

Above all, and as our other experts noted, Mr Loosmore says it is key to remember that the adviser is providing the advice.

Mr Loosmore says: “Any technology solution should support the adviser in doing this more efficiently and in a way that facilitates client engagement, but it is important to note the technology is not replacing the qualified professional.”