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Struggling to comprehend a product?

This article is part of
Guide to Due Diligence

If you, the adviser, do not understand a product then you must assess whether this is because of a knowledge gap on your part, or due to an inherent complexity of the product. The former would require you to you need to undertake continuous professional development so that you do get to grips with it, the latter might imply that it should not recommended at all.

If you do not understand a product, Rebecca Prestage, head of policy of The Consulting Consortium, says you should always proceed (if at all) with caution in recommending it.

“If an adviser can’t understand a product, then a client/man in the street is unlikely to understand the product either. Be wary/suspicious of products that are complex and difficult to understand.”

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Simon Thomas, head of policy for Tenet, agrees that if you don’t understand or don’t like a product then really you should not recommend it, pointing to the case of Arch Cru, the risk profile of which was mis-understood and leaving many advisers that believed they had acted in good faith facing a hefty redress bill.

If you purchase network or support service support, Mr Thomas recommends telephoning your relevant helpdesk for some expert advice if you struggle to understand a product.

Stephen Gazard, managing director of Sesame Bankhall Group, notes the Financial Conduct Authority does not expect advisers to have specific details on all products immediately at their fingertips.

But Mr Gazard adds advisers should be able to identify when generic product types might be suitable for customers.

“If you identify a client who may be suited to a particular product, you should go away and research it and make sure you fully understand it prior to recommendation, or seek input from another adviser who fully understands the product.

“Ultimately, if you do not understand a product, you should not recommend it as you will be unable to ensure your customer understands it.”

The FCA, in a One Minute Guide to Improving the quality of your advice process, warns ultimately if you do not understand a product you should not recommend it.

The FCA stated failure to put in place appropriate plans to assess and monitor higher risk products could ultimately lead to serious implications for your business, such as:

• increased complaints

• lack of customer understanding

• greater professional indemnity insurance costs

• reputational risk

• regulatory action

• poorly-trained advisers and staff

• loss of customers