Compliance is no longer simply a question of checking client fact-finds and recommendations.
The Financial Services Authority’s focus on the quality of advice and clear client information coupled with its introduction of the Treating Customers Fairly initiative and a principles-based approach places the responsibility for compliance firmly on advisers.
Along with recent mis-selling scandals, this has caused financial services companies to invest in this area. The FSA’s requirements can only be met with innovative information technologies, possibly requiring database restructuring and business process redesigns.
Recent estimates show that compliance costs can be up to 35% of companies’ expenses compared with less than 10% a decade ago.
Given that compliance is now such a significant cost for firms it is essential that their processes work to ensure it is achieved while simultaneously facilitating sales. This can only be done if it is treated as an integral part of the advice process.
This goal can best be achieved by developing business intelligence solutions and investing in the right technologies, as recommended by the FSA. These can aid compliance significantly, dramatically reduce costs and improve quality of service, thereby increasing sales.
Technology can underpin a robust compliance regime in a number of ways.
First, it can provide an audit trail of what has been done, when and in what order. There is no way of manipulating the figures as the technology provides a factual account of what has been processed.
Second, technology can ensure that advisers are compliant when selling to their clients as a result of dedicated algorithms built into their systems.
These will prevent intermediaries from mis-selling products to ineligible consumers and can work in a number of ways:
l Preventing advisers from removing unsuitable options based on data collects.
l Showing warnings to advisers and clients or creating qualification statements to ensure that information input is correct, minimising the possibility of errors.
l Dictating certain gateways that advisers must navigate. For example, a system might prompt them and ensure that they have enough data to talk about customers’ needs. If advisers ignore this, the system will prompt them to impart advice while warning consumers.
l Allowing compliance to be supervised more effectively and at lower cost. Individuals can access cases and communicate with advisers remotely.
So technology can be used to support an efficient, inexpensive risk-based compliance regime.
How an algorithm might work in practice is best illustrated by working through some examples.
Consider the following scenario. An adviser undertaking a full mortgage fact-find discovers that their customer has no life cover in place but does have dependants.
If the adviser were to go down the route of recommending a pension and ignoring life cover, the technology would identify that the default hierarchy of needs was compromised. It would then bring this to the adviser’s attention. The adviser would have to change tack or the reason for the deviation would be captured.
This information would then be transferred to a suitability report, created as a result of the session. This ensures the information is available to the company’s management and compliance function at any time.
The same would apply to mortgage products. If data gleaned as a result of a fact-find identified the key attributes of a client’s ideal mortgage but this conflicted with the system’s requirements it would, through alerts, raise the issue. The session would change tack or a justification would be recorded and information be transferred to a suitability report.
These principles would apply to other products sold alongside mortgages, be they compliant sales of life cover, payment protection or buildings and contents insurance.
If, for example, an individual was taking out life cover to protect their mortgage although it was clear that they had inadequate overall cover, the technology would highlight this.
A recommended course of action would then be displayed on a printed output and evidenced throughout the system’s audit trail.
Equally, the system could highlight when purchased cover is superfluous to clients’ requirements. There has been a great deal of adverse publicity regarding PPI recently and there are situations in which borrowers are not suitable purchasers. The technology would be able to identify this fact and indicate other, more appropriate options.
If, for example, an individual’s occupation and state of health made private health insurance a more suitable option, the system would alert advisers to this.
But perhaps the biggest advantage of a technology-based compliance process is the ability to offer instantaneous decisions. It not only eliminates petty errors that would usually be picked up during manual checking but also ensures that advisers remain firmly on track.
This removes the risk of a sales error being picked up at a later date by the compliance department, stopping a deal going forward.
Intrinsic, a multi-tie distribution network operating in the retail fin-ancial services industry, is an example of a firm that has benefited from a technological compliance framework.
Its system, regardless of the distribution channel, ensures that no sales are made unless all the required information is collected, assimilated and pro-cessed in a compliant manner. See below for examples of the system.
A full audit trail allows detailed checks to be made, ensuring customers receive the best financial advice.
In short, a compliance process underpinned by technology can reduce paper-based compliance costs, prompt compliant selling and ensure that all relevant information is collated for future reference, giving peace of mind to companies, advisers and customers.
Steve Jones is chief executive officer of N4 Solutions