Reviewing client files for suitability – avoiding the pitfalls

18 September 2018

client files

Firms often ask us to review a sample of client files, either to help test the effectiveness of their own suitability assessment processes and control regime, or for a larger back-book remediation project. We see a number of common pitfalls with firms’ in-house client file review regimes. Addressing these areas should help make sure your approach to suitability meets regulatory standards and puts your clients first.

Perform regular reviews of client files for suitability

It might seem obvious, but the most fundamental pitfall is not having any sort of regular client file checking regime in place. A surprising number of firms fall down on this count, generally smaller firms.

Without regular client file reviews, it is hard to see how your senior management can be confident that the client information on file is sufficient to evidence suitability, and that the right service and mandate has been recommended, or that the regular client information refresh process is being done to the required standard.

Also, if you’re not covering all your investment managers or advisers with a de-minimis level of client file checks, where’s your MI coming from to evidence ongoing competence for your training and competence scheme, and how do you know people aren’t slipping into bad habits because nobody ever reviews their client files?

Dedicate QA resource for suitability monitoring

This is closely related to the previous point. You need the infrastructure in place to deliver regular client file reviews, preferably in the first line, and that becomes more important the more your firm grows, and the more clients you take on. And it’s necessary to allow you to produce useful management information…

Produce useful MI from the results of client file reviews

You can’t generate the MI you need to assess suitability standards across your firm, or to pinpoint any failings and how to address them, without regular client file checks. See our separate article ‘How useful is the MI from your suitability monitoring activity?’ for tips on making your MI more effective.

Get buy in from front-office line management

Do the line managers of your IMs / advisers consider that it’s their job to enforce suitability standards? In our experience, suitability is taken much more seriously when there is genuine ownership and buy-in from front office management, rather than being something imposed on them by compliance.

Agree standards, guidance and training on how to evidence suitability

It’s important that everyone has a common understanding of what a good client file looks like, and what standards are expected. It’s surprising how often there is a lack of agreed and documented guidance or training on what KYC information you need to evidence suitability. It’s difficult to hold people to account if no one can agree what the standards are in the first place. In our experience, it’s a good idea to train your front office team on suitability using real client files as case studies. Ask them to review the key documents as if they were an independent observer (such as the FCA or FOS), and ask themselves whether they demonstrate suitability.

Focus on client outcomes, rather than on process in your suitability checks

Some firms use a tick box checklist to test whether all the steps of the client onboarding process have been followed correctly, so that the account is set up on the correct basis from the outset, all the necessary documentation is present and fully completed, and all the necessary information has been issued to the client. This is all well and good, but is not a substitute for testing whether suitable outcomes have been achieved. Checking suitability requires a different type of assessment methodology involving the use of outcomes-focused questions and judgement / common sense to establish:

  • whether the evidence on file demonstrates that the recommended investments, or the service and portfolio strategy selected for the client, are suitable for this client’s objectives and circumstances, and
  • (for managed portfolios) whether the evidence on file demonstrates that the client’s portfolio is being managed in line with the selected mandate.

Keep suitability and process failings separate

Does your MI tell you whether the file failed because it didn’t evidence suitability, or because of a process failing? We sometimes see RAG or Pass / Fail ratings that don’t actually tell you whether the case is suitable. If someone asked you what percentage of the client files you checked last month evidenced that the selected mandate was suitable for the client, could you readily answer that question? Our advice is to avoid conflating suitability with process and other failings in your file ratings. If necessary, use separate file ratings for suitability and for process / record keeping.

Prioritise and group your remedial actions 

The same principle about avoiding conflating suitability with unrelated process failings applies to the remedial actions you ask advisers or IMs to carry out when you feedback the results of the client files review. In our opinion, it’s not helpful to produce a long, unprioritised list of actions for the IM to make sense of. Which actions are really necessary to evidence suitability on this case, and turn it from unclear to suitable? Which ones are more minor points that can be addressed at the next scheduled review with the client? Which remedial actions have got nothing to do with suitability at all?

For example, let’s say that the first remedial action in the list is to ask the client to sign the latest version of the firm’s T&Cs, followed by several more remedial actions to address process failings. Finally, the sixth action states that client contact is needs because the objectives are not recorded, there is no information about income or assets and the client’s risk profile has changed without any explanation. From a suitability perspective, that’s the problem we really need to be addressed as a matter of urgency. But the adviser may have given up reading before getting that far. To avoid this, group and prioritise different types of remedial actions under some agreed headings.

Include service selection as part of the suitability check

As part of your MiFID II implementation project, your firm should have conducted a target market assessment of the investment services you offer to clients. Many firms offer several such services (bespoke discretionary, MPS, advisory managed, advice and dealing, financial planning, etc.), and their target markets should all have been compared and contrasted using the five ESMA target market assessment factors. So it should be clear which type of client needs each service is designed for.

But there’s not much point in producing a target market analysis for all your services if your advisers and IMs don’t use it in practice to recommend the best service to meet each client’s needs. In our experience, too many individuals simply recommend the same service (often bespoke discretionary) for everyone, because that’s the service they want all their clients to have. So, as part of the client files check, we think it’s important to consider whether the client is in the most appropriate service. For example, reviewers should ask themselves whether that £30k portfolio that hasn’t been added to for ten years really should be in the bespoke discretionary service.

Take steps to ensure your client files reviewer are taken seriously

Why aren’t some client files reviewer taken seriously? Is it because they lack the judgement and experience to focus on what’s really important, so they fail cases for petty / pedantic reasons – which means nobody has any respect for them? Or is it because the IMs and their line managers haven’t really bought into suitability, so they don’t think it’s an important part of their job to demonstrate that they are doing the right thing for their clients?

Check suitability across all relevant service lines

These days, a lot of wealth management firms focus on discretionary management as the core of their proposition. But what about those residual advisory clients? They still need to be receiving suitable advice, and your client file checking regime still needs to include these services.

To find out more about what systems and controls you should have in place to make sure clients’ investment portfolios are suitable, read our suitability survey: Everything under control?

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