Take good care when employing 3rd party consultants

Take good care when employing 3rd party consultants

When working with adviser and planner firms or private banks and wealth managers we like to understand their requirements and ensure that all stakeholders’ needs are factored into the consultancy engagement.

It has come to our attention that some business development services offered, particularly around customer engagement documentation such as terms of business and service agreements have fallen short of the regulatory and client best interest rules.

The reason why I think it’s important to blog about this is because we care about the consultancy industry just as much as we care about the retail advice industry where I practiced as an IFA and regional director for over a decade.

When we decide to work with our clients in the retail advice industry, we always conduct a diagnostic to check key factors are in place. One of the most important is the understanding for and application of the regulatory rulebook. Without this, adviser firms who take the bold step of employing an independent consultancy, run the risk that their customer service proposition and all related customer engagement documentation will be non-compliant.

Even if consultants stipulate they are not a compliance consultancy (and we are not) it doesn’t matter. With a highly regulated market where protecting the consumer position is the number one priority, this means any consultancy needs to apply the rule book to their recommended business development strategies.

One such case recently showcased how good intentions overplayed basic due diligence requirements. An adviser firm’s client service agreement was re-designed by an agency that obviously had scant knowledge of the rules and regulations. This isn’t the first time we’ve come across this, so I thought a checklist could come in handy for advisers and planners who take on consultancy firms:

1. Ensure they have a firm understanding of the following rules: a. Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly; b. Principle 7: A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading; c. Principle 9: A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment d. COBS 2.1.1: A firm must act honestly, fairly and professionally in accordance with the best interests of its clients: e. COBS 9.2: Suitability: Firms must collect a range of information regarding circumstances and objectives dependent on the range and nature of the service provided. In relation to the above the consultancy must have an understanding of the ‘know your client’ information, collating specific objectives such as resources, priorities, (e.g. income and/or growth). Specific information will help determine the suitability of services and this all should dovetail into the suitability/financial report.

2. Have a fundamental understanding for the advice process and how this gels the firm’s philosophy with the regulatory and any associated tax requirements such as VAT.

3. Know risk definitions and how they apply to the client risk profiling and calibrate with KIID’s and the Synthetic Risk Reward Indicators i.e. a. Risk tolerance b. Risk capacity c. Risk required

4. Have full awareness of the COBs 2.3 inducement rules and apply the same tests to their business interests. This means ensuring they are independent and do not have any conflict of interest when entering into consultancy arrangements with advisers.

5. Apply behavioural and relational tests to key client strategies such as segmentation, surveys or mapping the customer journey. With the regulatory move to applying behavioural science to its customer protection agenda, the importance for understanding client decision-making is now crucial to incorporate into client-centric strategy.

6. Employ the regulatory requirement for sustainable services and clear communications: In their thematic review TR14/6 the FCA stipulate 73% of firms assessed are not clear on charges and what they mean for their clients. The FCA want you to be transparent and offer simple yet accurate explanations of your services and fees.

7. Aligning back office operations with front office. This means taking a holistic view on the business and applying regulatory compliant technologies and tools that ensure each department relationship is mapped and silo mentality avoided

8. Finally but not least ensure that they apply evidence-based practice. This means testing the adviser fee charging against the proposition costs to ensure the business remains profitable and offers continued value to the clients.

These are just some of the key areas we cover before entering into an agreement to consult. With an ever attentive regulator I think it’s crucial for firms to become more savvy in their approach to business development practice and ensure they conduct due diligence on the consultants to ensure they’re not influenced by the consultancies personality only.