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Treating Advisers Fairly

The introduction of the FAIS Act and supporting regulations contributed to making the provision of financial advice a more daunting and costly service than ever before.

Prior to 30 September 2004, we saw a gradual decline in support from product providers for all but the top producers. The quality of advice, in some instances, was subservient to the volume of business produced, particularly where such production consisted of business with high fees for the product provider.

Those who did not conform to minimum production standards saw themselves relegated to call centre services, and even cancellation of contracts for insufficient production for a specific product provider. Long gone are the days where broker consultants were at the beck and call of advisers, eager to drop off sales material, and even more eager to pick up half completed application forms.

With the introduction of FAIS we saw a new trend.

After an initial period of allowing the industry to settle in, regulators had to make their presence felt. The term “low hanging fruit” became standard terminology as individual advisers had to bear the brunt of escalated regulation while most of the bigger entities had the financial and legal resources to effectively fight their cases. In one instance, a big corporate was simply given a warning for a serious transgression, while some single brokers were penalised with what appeared to be excessive fines, considering the practical implications of the transgression.

A lot will change after the Retail Distribution Review. For example, consultation is currently taking place to address the cancellation of contracts based on lower than expected production, a practice which certainly discriminates against advisers and clients.

Perhaps the six outcomes of Treating Customers Fairly (TCF) should be reworded to address the future treatment of advisers.

Financial advisers can be confident they are dealing with firms where TCF is central to the corporate culture

While the interests of shareholders dictate decisions in the board rooms, TCF will never be more than lip service, with convenient fall guys in position in the event that the firm gets exposed.

Products and services are designed to meet the needs of identified customer groups and are targeted accordingly

While financial advisers are incentivised (and even threatened) to promote certain products because there are higher fees for the product houses than in the alternatives, which are mostly in the best interests of clients, clients will remain the losers. Think of endowments versus collective investments, or conventional retirement annuities versus unit trust linked ones.

Financial advisers are provided with clear information and kept appropriately informed before, during and after point of sale

In many instances, the mushroom principle still applies as far as this is concerned. Those at the point of sale are only given enough information to conclude the deal, despite their legal obligation to ensure that the client makes an informed decision. When the pawpaw hits the fan, it is the adviser who failed to act with due care and diligence.

Where advice is given, it is suitable and takes account of customer circumstances and needs

As long as bonuses of product provider management are product driven with specific weightings for those with more lucrative fees, beneficial outcomes for clients will be more by accident than by design.

Products perform as firms have led advisers to expect, and service to advisers is of an acceptable standard to ensure fair treatment of all clients

The proposed obligation on product houses to ensure that advisers not only receive generic product training, but also acquire provider specific knowledge will contribute to the realisation of this ideal.

As far as service is concerned, it is mostly the intermediary who faces the client, who gets it in the neck when things go wrong. This often stems from sub-standard service as a result of insufficient production which leads to the client receiving unfair treatment.

As one adviser I spoke to put it: some product providers have even abdicated/delegated some of their servicing responsibilities to the advisor who, due to regulatory threat, has to pick up this obligation and overcome the call centre barriers to ensure servicing of their clients.

Intermediaries do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint

Customers, again, are the ultimate victims where this does occur.

Finally, as in the case of treating customers fairly, product providers should inculcate these outcomes in their everyday dealings with advisers.

It should not be a mere list of “do’s” to tick off – they should also be able to demonstrate the “what” and “how” of treating customers fairly via intermediaries.

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