GUIDANCE NOTE: RECORDS OF ADVICE and THE NEEDS ANALYSIS PROCESS

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1 GUIDANCE NOTE: RECORDS OF ADVICE and THE NEEDS ANALYSIS PROCESS The process to be followed in providing advice is dealt with in the FAIS Code of Conduct Part VII, Sections 8 & 9 This section sets out the process to be followed. The actual regulations are as follows; FURNISHING OF ADVICE Suitability 8. (1) A provider other than a direct marketer, must, prior to providing a client with advice- (a) take reasonable steps to seek from the client appropriate and available information regarding the client s financial situation, financial product experience and objectives to enable the provider to provide the client with appropriate advice; (b) conduct an analysis, for purposes of the advice, based on the information obtained; (c) identify the financial product or products that will be appropriate to the client s risk profile and financial needs,subject to the limitations imposed on the provider under the Act or any contractual arrangement; and (d) where the financial product ( the replacement product ) is to replace an existing financial product wholly or partially ( the terminated product ) held by the client, fully disclose to the client the actual and potential financial implications, costs and consequences of such a replacement, including, where applicable, full details of- (i) fees and charges in respect of the replacement product compared to those in respect of the terminated product; (ii) special terms and conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided, which may be applicable to the replacement product compared to those applicable to the terminated product; (iii) in the case of an insurance product, the impact of age and health changes on the premium payable; (iv) differences between the tax implications of the replacement product and the terminated product; 1

2 (v) material differences between the investment risk of the replacement product and the terminated product; (e) (vi) penalties or unrecovered expenses deductible or payable due to termination of the terminated product; (vii) to what extent the replacement product is readily realisable or the relevant funds accessible, compared to the terminated product; viii)vested rights, minimum guaranteed benefits or other guarantees or benefits which will be lost as a result of the replacement; and; (ix) any incentive, remuneration, consideration, commission, fee or brokerages received, directly or indirectly, by the provider on the terminated product and any incentive, remuneration, consideration, commission, fee or brokerages payable, directly or indirectly, to the provider on the replacement product where the provider rendered financial services on both the terminated and replacement product."; take reasonable steps to establish whether the financial product identified is wholly or partially a replacement for an existing financial product of the client and if it is such a replacement, the provider must comply with subparagraph (d)." (2) The provider must take reasonable steps to ensure that the client understands the advice and that the client is in a position to make an informed decision. (3) A provider providing advice to a client to replace an existing long-term insurance contract or policy with any other financial product must at the earliest practicable opportunity after providing such advice, but in any event no later than the date on which any transaction requirement is submitted to a product supplier in respect of any replacement product, notify the issuer of the existing and the replacement long-term insurance contract or policy of such advice."; (4) Where a client- (a) has not provided all information requested by a provider furnishing advice, as part of the analysis referred to in subsection (1)(b), or where the provider has been unable to conduct such an analysis because in the light of the circumstances surrounding the case, there was not reasonably sufficient time to do so, the provider must fully inform the client thereof and ensure that the client clearly understands that- (i) a full analysis in respect of the client referred to in subsection (1)(b) could not be undertaken; (ii) there may be limitations on the appropriateness of the advice provided; and (i) the client should take particular care to consider on its own whether the advice is appropriate considering the client s objectives, financial situation and particular needs; or 2

3 (b) elects to conclude a transaction that differs from that recommended by the provider, or otherwise elects not to follow the advice furnished, or elects to receive more limited information or advice than the provider is able to provide, the provider must alert the client as soon as reasonably possible of the clear existence of any risk to the client, and must advise the client to take particular care to consider whether any product selected is appropriate to the client s needs, objectives and circumstances. Record of advice 9.(1) A provider must, subject to and in addition to the duties imposed by section 18 of the Act and section 3(2) of this Code, maintain a record of the advice furnished to a client as contemplated in section 8, which record must reflect the basis on which the advice was given, and in particular- (a) a brief summary of the information and material on which the advice was based; (b) (c) (d) the financial product which were considered; the financial product or products recommended with an explanation of why the product or products selected, is or are likely to satisfy the client's identified needs and objectives; and"; and where the financial product or products recommended is a replacement product as contemplated in section 8(1 )(d) - aa) the comparison of fees, charges, special terms and conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided, between the terminated product and the replacement product; and (bb) the reasons why the replacement product was considered to be more suitable to the client's needs than retaining or modifying the terminated product. Provided that such (continue) 3

4 Provided that such record of advice is only required to be maintained where, to the knowledge of the provider, a transaction or contract in respect of a financial product is concluded by or on behalf of the client as a result of the advice furnished to the client in accordance with section 8. (2) A provider, other than a direct marketer, must provide a client with a copy of the record contemplated in 9(1) in writing. As you can see the Code sees the process as a seamless one. It is the marketplace that has developed the (practical) concept of two distinct procedures and related documents of Needs analysis and Record of advice. PS have followed this concept as we believe that they are indeed two separate procedures where in certain circumstances one can be done independently of the other, if correctly handled, namely the Price comparison concept. So as can be seen; The process starts with the analysis, which obviously will differ from client to client and product to product (the needs analysis process). It then moves into advice being presented to the client (Record of advice/ Quote document) And then into confirming covers with the need to highlight the risks being taken where advice offered is not being taken by the client. The client is then required to be provided with a summary of the information upon which you based your advice i.e. you provide them with a copy of the analysis document. Client declarations The need to ensure a client understands the advice offered or that should they not accept any aspect of advice you offer there may be risks, has led many brokers to seek a signed document from their client to this effect. This is not a specific requirement under FAIS and certainly not always possible, especially where most or all of the communication is telephonic. However as there is an obvious desire for this process we have expanded the original letter of appointment and understanding we originally produced to cater for all possible eventualities in the quote/renewal process. It can be used for both long and short term business and can be used for both face to face and remotely handled business. Once again we need to raise a note of caution having a declaration signed to the effect that the client does not want a full analysis can be accepted occasionally but it cannot be used as a means of you not performing an analysis. Having a declaration signed, on the other hand, without there having been any attempt to discuss or promote the completion of a Needs Analysis is not an acceptable practice. The audit process will demand that an effort is made and can be seen as such, to conduct the analysis. Large volumes of such declarations will be a cause for concern by ourselves and certainly will not be accepted by the FAIS Ombud s office as a way out of your responsibilities so use such documents with great care. 4

5 Price comparisons We have advocated for some time that to limit the time spent on detailed needs analysis for every quote a Price Comparison process can be adopted, as long as confirmation of this process and it s limitations and risks are confirmed. This allows you to provide quotes based on the usual scenario of limited information on the risk in question or the copy of an existing policy schedule yet still in a FAIS friendly manner. Once interest has been shown by the potential client the more detailed analysis can be undertaken. This analysis would also include the replacement product requirements where applicable. Whilst this methodology is more often seen in the short term environment it can be used in the long term environment just as easily although care needs to be taken in the investment products due to the specific nature of disclosure detail required in this category such that this option is best avoided. Record of Advice Various examples have been provided in this manual for differing classes of business. They can be used in a Price Comparison or Full analysis process. They include the specific requirements needed for Investment products as well as where Replacement product advice is needed, be it in the short term or long term environments. Insurers quote documents: We have differing views on the use of these documents depending upon the class of business. On the life and health side most brokers utilise the documents supplied by the insurer as they are generally very comprehensive and contain all the required product disclosures a broker needs to bring to the attention of the client. We would suggest though that where used a good covering letter is used to draw the clients attention to the most important aspects as these documents can be very detailed and a little confusing to a client, especially an inexperienced one. The equivalent documents issued by most insurers/administrators on the short term side fall far short of the required client submission standard. Many are little more than a summary of premiums and sums insured and generally specific to that providers product with liberal use of abbreviations, which whilst understood by the broker not by a client. It is for this reason we do not advocate the use of these documents for the submission of a Record of Advice to clients. Your own Record of Advice standard is much preferred as it allows full advice aspects to be built into the document and you achieve a far higher level of consistency and quality of advice. Where you feel compelled to use the insurer/administrator document a covering letter MUST be issued to provide the additional explanation and advice needed. 5

6 New Business analysis Once you have a client interested in the price it is time to do the analysis. Remember this is the data that ultimately needs to be sent back to the client as part of confirming cover and ensuring the client fully understands the what? and the why? of the cover you have provided. What is a Needs Analysis? Motor Only A fully completed proposal supported by a detailed Record of Advice that has to include basis of value, excess structure, security requirements, driving restrictions if applicable and premium payment terms if not dealt with in the Disclosure document. If an insurer quote document is used these issues need to be highlighted to the client if included or added if not. NB: 1. Where the insurer used does tele proposals the broker needs to complete a proposal or an analysis document and cannot rely on the telephone call from the insurer. 2. A proposal on its own is not acceptable as an analysis but if this is all that has been used it must at least have been copied to the client or if the client completed it and faxed/ ed it to the broker then reference to the importance of the information in the document must be made. Personal Lines A fully completed proposal supported by a detailed Record of Advice that has to include basis of value per section, excess structures, security requirements, driving restrictions if applicable, any other major limits that are applicable, uninsured risks relevant to personal lines and premium payment terms if not dealt with in the Disclosure document. If an insurer quote document is used these issues need to be highlighted to the client if included or added if not. NB: 1. Where the insurer used does tele proposals the broker needs to complete a proposal or an analysis document and cannot rely on the telephone call from the insurer. 2. A proposal on its own is not acceptable as an analysis but if this is all that has been used it must at least have been copied to the client or if the client completed it and faxed/ ed it to the broker then reference to the importance of the information in the document must be made. 6

7 Commercial Lines There needs to be either; 1. A specific analysis document (this need not be our drafts but must cover the basics and be fully completed. N/A or a line drawn through sections are not acceptable) OR 2. Minutes of the meeting and/or discussion that took place. These need not be set out in a formal minute s format and would usually be seen in a detailed letter/ to the client. Aspects such as Basis of value, average etc are probably still better handled as attachments in this format. Renewal Version Motor Only A good renewal letter and/or Record of Advice that highlights the changes to values or any terms. The letter should invite a response and/or assume acceptance and understanding if the broker does not hear from the client. Personal Lines A good renewal letter and/or Record of Advice that highlights the changes to values or any terms in each section plus highlighting uninsured risks relevant to personal lines. The letter, assuming no meeting will be held, should invite a response and/or assume acceptance and understanding if the broker does not hear from the client. Commercial Lines A good renewal letter and/or Record of Advice that highlights the changes to values or any terms in each section plus highlighting uninsured risks relevant to commercial lines and the clients operation. The letter, assuming no meeting will be held, should invite a response and/or assume acceptance and understanding if the broker does not hear from the client. If a meeting is held either prior to or subsequent to the submission of terms then a follow up letter should be issued confirming the changes or that no changes were wanted. 7

8 On the Life/Pension Side This is far harder to list but generally reliance is made by the long term broker on the standard formats that are issued by the various insurers and/or IT systems such as Spotlite. Generally the principals do not alter from the short term and the same objective of formality on information collection and a good record of advice remain the same. Most brokers use the insurer documents to submit terms to a client given the generally good level of information they contain but these should be used in conjunction with a good submission letter that draws the clients attention to the important aspects even though there tends to be a very high level of client visits when submitting life/pension terms/advice. There should also be follow up once the decision has been made as to what has been placed on cover, highlighting that advice not taken, ensuring the client has a copy of the analysis etc. As most life insurers tend to submit policies direct to the clients after issuing this formality is vital once the cover has been placed. In addition to the use of such a document for new business we are also advocating its use on existing business as part of your renewal/review process. This will ensure that all your business is written based on the same standards adopted for the newer business. We appreciate that existing clients often dislike the expanded time of meetings as a result, especially as they feel you know, or should know, all you need to anyway. This is a situation you need to learn to manage and ensure that if you are chased away that your inability to carry out this review is at the client s risk. Just one word of advice for the renewal process do not fall into the trap of blaming the Act, the FSB or your Compliance Officer you are doing this because you want to ensure you offer your client the best possible advice and service. Remember that your advice needs to be tailored to the knowledge of the client. However treating your client as all knowing as thus not in need of an analysis does not give you the excuse to not perform a proper analysis. We would also refer you to our cautionary note below in Client declarations. What else do you need? Basically just a decent covering letter that will bring all the documents used together. Templates that cater for differing situations in both the new business and renewal process such as I do not have time for a full analysis or We do not want to take some of your advice or We cannot afford what you say we need or you prepare letters individually as you need them your call. Just a couple words of warning, based on what we have encountered, on very detailed templates: - They can get impersonal and specific needs or requests can get lost have a format that allows you to get the personal issues dealt with. - Take care that previous comments on a template are not left behind by mistake, besides being embarrassing it can lead to serious trouble for you. 8

9 Summary How effective all this information is can be debated in many cases. Whilst a broker may be procedurally correct the quality of advice may be poor and vice versa. Our role in audits is to primarily focus on the procedural correctness. We are not the broker and any advice we offer in relation to the correctness of covers and advice offered is to add value to the audit process and in no way can be seen as advice intended for your clients that is your task. The various draft documents provided, be they Records of Advice, Needs Analysis or standard letters are there to assist you in developing a set of documents and procedures to ensure compliance and should not be seen as prescriptive in any way 9