Working with advisers over 20 years has shown me where the cracks are

Running a successful compliance consultancy with 200 advisers on her books, she has learned to understand the confusion that still exists in the advice community about certain rules, and the “honest mistakes” and oversights that can happen in any well-run company.

As advisers are heading towards one of the biggest regulatory changes in a decade — the consumer duty — Holman reflects on the crunch points and why they could become more significant in future. 

One of the things she has come across repeatedly since she set up Cats in 2005, is companies or advisers unknowingly acting outside their permissions, which is a breach that is notifiable to the Financial Conduct Authority.

Holman says that with pension contracts, for instance, the devil is often in the detail and it can catch advisers out.

“We’ve had instances, for example, where a firm’s got limited [defined benefit] pension transfer permissions, which means they can advise on a policy that’s got a guaranteed annuity rate or a money purchase occupational pension scheme,” she says. 

“There are times when you may get a bit of a random contract coming through — it’s a small pot and it has something along the lines, it doesn’t say guaranteed minimum pension but it says a guaranteed pension, for example.”

Some advisers took this to mean a Gar, which means they are not breaching the rules but it is not actually a Gar, Holman says. “If there’s a statement that says you’ve got to sign a form for an adviser to confirm you’ve had advice that suggests it’s safeguarded benefits and therefore the limited permission is not sufficient, you need full DB pension transfer permissions.”

The customer duty is not about taking away responsibility from the client, if anything, it is the total opposite

On an individual basis, advisers have been acting outside their permissions when they either were not qualified to give certain advice, such as to sell down shares on a platform, or they were qualified but had not ticked this activity on their “statement of professional standing” — or the SPS was not renewed on time.

When such a breach occurs, Holman recommends notifying the regulator, which she says does not usually come with any bad consequences as long as it is properly explained. But it can be a tough task to get remedied.

“You get a very grumpy letter from the FCA [asking], ‘what happened?’,” she says. “You have to go back and review all the business that the planner has done from the time it’s expired, and report back to the FCA what you’ve done, what the findings are, any unsuitable advice, how you’re going to make sure it doesn’t happen again. And for some firms that has been chunky.”

Love for financial planning

Holman set up Cats after getting disillusioned with her in-house compliance job at a local company in Colchester.

“When I set up Cats I thought it was just gonna be me working in East Anglia and London, happy days. But luckily I’ve been working with a small bunch, a handful of firms. I then got referrals which took me out to the West Midlands and all over the place,” she says.

Adviser Phil Billingham then introduced her to the then Institute of Financial Planning and its certified financial planner community, which she was very fond of. She ended up sitting on the board of the IFP before it was merged with the Chartered Institute for Securities & Investment.

In 2009, she and her husband, Martyn Holman, decided to run the business together, and with the help from some former colleagues at DBS Financial Management — the independent financial adviser network Holman once worked at — the business has grown ever since.

It looks after about 200 companies throughout the UK that are predominantly financial planning firms of below five advisers, though some of its clients have more than 10 advisers.

Holman says the issues she comes across are not too dissimilar in large and small companies, but implementation can be different.

Whereas larger companies have more layers and hoops to jump through and are therefore typically slower to implement changes, smaller firms often have fewer people to do the work, she says.

The burden on small companies shows, for instance, when big changes are on the cards such as a change of customer relationship management, which is resource intensive. 

Companies large and small have been guilty of an “obvious” oversight though, which is their advisers’ obligation to do protection continuing professional development, even if they do not technically advise on protection. And the obligation is a hefty 40 per cent of overall CPD, Holman says.

She says that under the insurance distribution directive, advisers are required to do 15 hours of protection CPD included in their overall 35 hours.

“A lot of financial advisers say, ‘well, I don’t do protection, so I don’t have to do it’. That’s wrong because the distribution directive covers things like long-term care, annuities, insurance, pensions, pension contracts, trust work. So every financial planner will have to do protection CPD,” she says.

Holman says that breaching this is not a notifiable event to the FCA; however, it should be notified on the breaches log and it could affect the adviser’s competency statement.

“It would suggests under fit and proper rules, competency would include CPD,” she says. “Then it’d be for whoever is responsible for signing that certificate of competency [to decide] are they happy to sign and put their name on it and be accountable to the FCA if that person has not done their 15 hours of protection [CPD]. It’s a bit of a faff. But nonetheless, it is a requirement.”

Companies have also found to be lacking when it came to recognising a complaint before them, which can be detrimental to the insurer’s willingness to cover a payout.

Holman explains: “A complaint can be picked up by anybody in the team, so a distinction between is somebody actually making a complaint [or not can be tricky]. [Sometimes] they think they may be and they fudge it, they try to wash over it, and try to placate the complainant and so they don’t have to record it as complaint, for example, or notify PI. People panic that it’s going to increase their [professional indemnity insurance] premiums.

“What tends to happen if you’re not treating it properly, things escalate and then all of a sudden it is a proper complaint.” A PI insurer may then not cover the claim if it was not notified in time, she adds.

Holman says there is also a misconception that advisers do not have to deal with complaints until they are put in writing, which is wrong. Even verbal assertions that a client is not happy need to be actioned as complaints.

A heavier burden

Innocent oversights may not invoke bad consequences, but there are some regulatory requirements that will become turbocharged under the consumer duty and the regulator may not take too well to non-compliance in these areas in future.

One such requirement is to ascertain a client’s environmental, social and governance preferences, and Holman feels “there’s a lot of work for firms to do in this area”.

Under existing Conduct of Business Sourcebook rules, in order to really ascertain a client’s objectives, their ESG objectives have to be taken under consideration, she says.

Even if a client does not appear interested, "you still have that obligation to properly delve down and ask that question of the client, and then also have the knowledge to have a decent conversation [about ESG]", she says.

Ask the client, 'what could I do to make you read this report?' Don't make assumptions. This is what this consumer duty is about

The FCA's new ESG investment labels should help explain these products to clients, but companies should ensure that ESG is part of their process, as at the very least the consumer duty's cross-cutting rule to enable and support retail customers to pursue their financial objectives requires it.

Companies that are not prepared to do an ESG offering should have an alternative plan in place such as using a discretionary investment manager or lose the client.

Another process that will be particularly important under the consumer duty, which puts an emphasis on the client services outcome, will be keeping track of client meetings and reviews.

Holman says that if there is no client meeting this does not negate the adviser's obligation to do a suitability assessment.

"Some firms think that if a client doesn't want a meeting you don't have to do a suitability assessment; you do. So you still have to have that communication and you have to base that suitability assessment on the last known details of that client," she says. 

"What firms need to challenge themselves on is if the client is not engaging for three years or so, is that data three years out of date, can you honestly say that is the suitable portfolio for their objectives and their risk portfolio?

"If you haven't had any contact with the client, that means you need to either disengage or really hound that client."

The timing of the review meeting should also be set in stone, not done at the end of a piece of work or at any other random date, she says. "If it's in March, it's in March, even if there's work that follows through."

This is a particular issue in companies that have taken on legacy books but don't have the capacity to do proper reviews with the clients, and it is resulting in complaints coming through that are virtually impossible to defend successfully, Holman says. 

She believes most problems in advice companies are caused by oversight or an honest mistake. But sometimes, and increasingly so, it can be due to lack of resources.

"Everybody's running around like headless chickens firefighting. To get staff is really hard, it's hard to get a financial planner, it's hard to get paraplanners, hard to get admin people, and with wages being demanded so high, that is really putting a strain on firms," she says.

"Sometimes resource is not an issue, and it wouldn't be acceptable to the FCA [as an excuse], but that's just the reality."

Evidencing value

A big part of the consumer duty that advice companies could find themselves struggling with is the price and value question, according to Holman.

The FCA is not advocating that cheap is value, "but it is forcing firms to properly look at what is their value, how much do they need to earn in order to deliver a good service and investment into the company and be sustainable", she says.

"That's your starting point then, and have fair remuneration for your directors, their qualifications and all the rest of it. It is in nobody's best interest if a firm is operating on so low income that something takes them over the edge and they go bust and they end up at the [Financial Services Compensation Scheme]."

Then there are issues such as cross-subsidising client income. Holman says there is nothing in the guidance that talks about cross-subsidy directly. But the inference is "is somebody with a higher portfolio over here subsidising somebody over there and they're getting exactly the same service".

She continues: "It's forcing firms to properly look at what service are they providing. For some firms, whilst it's been a right pain in the backside, it has forced them to look at what they're doing and where the resources are going and they've identified they actually need to have a minimum fee in place, they've had to increase their charges for some people, some firms have introduced caps or tiering.

"For example, some have totally overhauled their client proposition and they've said it's been hard work, but actually it's been a really worthwhile exercise to do.

"It's one of those tasks, it's blooming hard and if you procrastinate you're not going to do yourself any favours. You need to just put pen to paper, get it all down, and then figure it out."

She says advisers will also need to look at what their competitors charge, and while there is no benchmark in place, advisers have to be able to explain why they've chosen the fees they have chosen.

"The FCA are not saying to firms you have to make changes to your pricing, they are challenging 'why are you charging (x per cent), is it just because everybody does?'"

No more technical terms

Communication is the other aspect that will be key under the consumer duty and this time it will be a case of really simplifying the language used.

"The consumer duty is not about taking away responsibility from the client, if anything, it is the total opposite," says Holman.

"It is saying that absolutely [consumers] need to take responsibility for what their decisions are. But we have to make sure that we present the information to them in such a way that they can understand. And that's always been the case, look at Principle 7 — be clear, fair, not misleading."

She says the difference now is that the consumer duty is breaking this down and is forcing companies to look at not just their suitability reports, but their email communications, their website, and not burying terms and conditions.

When it comes to presenting suitability reports the key is to make them sound the same way the adviser sounds to the client when speaking, Holman says, as she offers some tips and tricks.

"Ask the client, 'what could I do to make you read this report?' Don't make assumptions. This is what this consumer duty is about. We're making assumptions all the time. This is saying 'no, you can't make assumptions, get to the nub of it," she says.

It's all about how you hold yourself out and your culture and your integrity

Holman says frequently asked questions can be a great way to engage with the client as it makes the conversation about the client and their questions.

"It's so much more engaging. So 'client agreement', [can instead be] 'what can we do for you' [...] 'what do I do if I'm not happy' [can be used] rather than 'complaints', and you can still make something absolutely compliant but not using legal jargon, regulatory jargon," she says.

"If I've got a report that's full of legal jargon, it's compliant, technically correct, absolutely. But yet I'm sitting here in front of you, effing and jeffing, the tone of the letter does not reflect how I'm speaking to you now.

"That's where a lot of the clients get a bit confused and therefore do not want to read the letter. If the tone of your letter, or what that looks like, reflects how I communicate with you, then I know it's for me. So that is a shift, that's a lot of work for firms to get their head around."

While some companies have been actively innovating around their communications, others have not quite grasped what the duty is asking of them, Holman says. "Some firms have been really awesome at this and really spend a lot of time with it, other firms are maybe perhaps missing a trick. So I think that's a big piece."

She adds: "There'll be stuff that happens, there'll be the odd slip up, but that's life, that's business. But it's all about how you hold yourself out and your culture and your integrity.

"And the firms that have got good practices and processes in place are more efficient, they're not running round like headless chickens, they're busy, but then everybody knows what they've got to do, they're accountable to it. And it's not like 'ah I thought so and so was doing it'."

Find out more

To view FTAdviser's consumer duty hub, click here.

carmen.reichman@ft.com