Firms must have a formal method of assessing the transfer risk factors. In our experience, many firms do not have an adequate transfer risk assessment process.
Firms must have a formal method of assessing the client’s knowledge and experience. Again, firms’ K&E assessment often falls short of the requirements in the rules and it can be difficult to see how a particular K&E assessment has altered the firm’s approach to that client in discussions or the suitability report.
In addition to having the evidence of client understanding, firms must have a record of steps taken to achieve that – i.e. a checklist.
In addition to confirming conclusion #3, the rules also confirm that firms need to log the steps taken to obtain evidence of understanding even if they were unable to evidence it AND explain why the firm proceeded with the recommendation regardless. We think this scenario should be one for firms to AVOID. If you can’t demonstrate that the client understands your recommendation, it is risky for both the firm and the client to proceed with that recommendation.
External or internal online (i.e. with no firm involvement in the process – client does it alone) video or presentation with inbuilt ‘self-test’ process that is logged could help evidence understanding of the tested aspects. Firms need to undertake appropriate due diligence on the process to assess what the video covers / misses in relation to the transfer risk factors.
Validated output from the process should be retained on file to support evidence of understanding. The process would ideally also have verification checks such as time spent by the client in each area so as to identify where a client might have simply ticked quickly through the process.
Any apparent conflicts or misunderstanding arising from such an external process or the internal transfer risk, K&E and ATR processes should be challenged, discussed, resolved and documented.
Similar to #6, any misconceptions arising in relation to relevant aspects of KYC should be discussed and documented. Advisers should challenge and clarify any conflicting ‘objectives’ and ensure the client understands any trade-offs that might be required.
All KYC docs should record the answers to open questions that are not leading or misleading. A ‘how would you feel if’ question with free text recording of the client response is better than the same question with a tick list of optional answers.
Bonus Conclusion #9
What about the suitability report? How can it aid evidence of client understanding?
We would suggest that the report should include all the standard suitability and COBS stuff but should also:
– Be as short as possible;
– Not contain reams of padding;
– Be client specific at every opportunity;
– Avoid jargon or explain it in clear plain English where it must be used
and using language generally that is reasonably appropriate to the
client’s assessed K&E level;
– In particular, should include a clear and balanced explanation of key
metrics such as transfer value comparator and the critical yield such
that the positive and negative implications of these are likely to be
understood by the client. It is not sufficient merely to state the