Posted: 9th April 2013
In February, the then Financial Services Authority (now the Financial Conduct Authority) published results of its mystery shopping review into quality of advice given in the sale of lump sum investments. Even if investments are not your priority, please read on: the FSA’s lessons, though apparently product specific, have relevance across the financial services spectrum.
Whilst approximately three quarters of customers received good advice the FSA had concerns with quality in 25% of cases. The findings highlight weaknesses in technical aspects of the sales process i.e. risk profiling and adequately assessing the level of risk customers were willing and able to take, and more basic errors in financial planning such as the failure to recommend repayment of debt and recommending investments for periods of less than 5 years.
In relation to assessing risk there are examples of poor practice in the paper which should be reviewed in conjunction with other publications such as “Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection” March 2011. The more interesting commentary in the paper relates to some of the other findings which, without the right testing and control environment, firms are not in a position to identify.
In 42% of cases advisers failed to give customers correct information: advisers failed to give the required initial disclosure, they made statements that were unclear or unfair and misleading and suitability reports contained inaccurate information or did not reflect what was discussed during meetings.
Many firms operate a sales quality function or a fact find checking unit which assesses the suitability of advice from a desk based review of the file. It is clear from the mystery shopping findings that firms need to do more to evolve their identification of advice related risks to incorporate customer engagement, understanding and an outcomes testing approach.
The mystery shopping review highlights a much bigger problem for firms in ensuring the quality of advice: consistency. The report states that firms provided suitable advice in three quarters of the mystery shops. The irony is that 75% is sufficient to pass most CII exams on the way to L4 status. Unfortunately, this is not an acceptable pass mark for the regulator when assessing customer outcomes.
In this post RDR environment ask yourself this: is your sales process and control environment robust enough to identify poor outcomes in both advice and disclosure? Assuming the answer to both of the above is yes, is your tolerance and risk threshold aligned to the regulator’s? The incoming FCA has a notably reduced risk appetite.
Mystery shopping is not merely a tool the regulator can use on firms; firms can use their own mystery shopping to compare evidence with the regulator’s when required. The FSA stated in the Journey to the FCA that it will mystery shop more frequently as part of the new supervisory approach. This review was focused on the banking sector but expect more of this work across other sectors and other issues.
