In the second part of our regulatory recap for 2018, two more experts talk to Money Marketing about their highlights from the last 12 months.
Were advisers up to the ongoing suitability test?
Julie Hepworth, group regulatory director at Perspective Financial Group
2018 has been a year of embedding and refining the requirements of Mifid II for advisory firms’ ongoing advice procedures.
Moving into 2018, firms already had established processes and diary systems in place to ensure that they completed reviews for ongoing fee paying clients in a timely manner, but the introduction of Mifid II raised the bar further.
Firstly, the requirement to reassess and reconfirm ongoing suitability, on the face of it, does not sound like a particularly onerous task given the depth of relationships that advisers typically have with their clients. But the term “reassess” triggers the need to review all of the know your client areas that would need to be considered when providing new advice. This must then be fully documented on the client file and confirmed in writing to the client to satisfy the periodic suitability assessment requirement.
Secondly, this must all be completed at least annually, which, assuming the firm has a system in place to deliver these requirements, should be achievable providing clients engage in the process at this frequency. Where a client does not engage in the review, the firm needs to decide whether it can continue receiving an ongoing fee. If it is unable to reassess and reconfirm ongoing suitability, it is unlikely that it will be able to.
These new requirements that came into being at the start of 2018 created legislative obligation on the firm as opposed to commercial, therefore each firm’s systems and controls need to reflect the requirements. Given that ongoing reviews are now essentially subject to the same requirements as new advice, suitability of advice file checks should now include ongoing reviews in addition to new business as it is equally as important to review to ensure that quality standards are being maintained.
Likewise, the firm’s senior managers should have visibility of each adviser’s and the firm’s ongoing review management information covering timeliness of review completion, issuance of the review letter to the client, number of clients (if any) that decline a review, and those that do not respond or engage so that emerging trends can be spotted easily and addressed.
This all makes good business sense but will have caused firms to be stricter with those clients who have a tendency not to engage as frequently as required. In more extreme scenarios, it has caused firms to terminate some ongoing relationships where clients are not engaging at all.