The FCA emphasises the importance of implementing and monitoring procedures, which should include file checks and reviews.
File reviews are a critical part of following the FCA’s fair treatment of customers principles too.
But how often should directly authorised firms check and review files, and what are the potential consequences if they fail to act?
Does My Firm Need File Checks and Reviews?
File checks and reviews are not just about the FCA’s compliance requirements, though this is an important factor in firms setting up their procedures.
The FCA has written to firms in the past when it has wanted to conduct a mass checking of files.
For example, the FCA has previously identified the suitability of the advice provided as an area of potential risk, and therefore focused it’s file reviews on assessing suitability, including looking at suitability reports.
File checks should act as a check for administrative errors, but also to enable firms to assess the advice process, and the quality of advice their advisers give to customers.
Reviewing files can help firms:
- Detect and deter any inappropriate behaviour.
- Identify areas for individual development and reduce the risks that come with non-compliant behaviour.
- Help to embed compliance culture in a firm.
- Support learning and development, in both the person being reviewed and the reviewer.
This procedure should check whether a firm’s internal processes and procedures are FCA-compliant and identify any areas where advisers are falling short in their compliance.
Consequently, the reviewer should have the necessary qualifications and experience to identify and assess any compliance-related issues.
Are File Checks and Reviews Compulsory?
Under the FCA’s training and competence regime, there is a high-level competence requirement that applies to individuals who undertake regulated activity in all UK authorised firms.
The rules and guidance for this include the regular review of training and competence needs of employees, and how they carry out tasks and behave in practice.
One demonstrable way of monitoring and assessing competency is by checking and reviewing customer’s files.
Obviously, supervision should go beyond file checking, but file checks and reviews are still central to this process.
There are several fundamental approaches to file checks and reviews:
- Standard file reviews
- New business checks
A standard file review is a comprehensive compliance procedure. The firm can do this internally, or use an external consultancy.
This type of review should ensure files follow the FCA’s and the firm’s own procedures.
It can cover issues such as the fact-finding process, product disclosure, and whether the suitability report contains risk warnings for the customer.
It may also assess whether the outcome was appropriate for the customer.
New business checks are more basic, focusing on when new business has been transacted and how this has been recorded on file.
This is a less detailed file review and more of an internal, administrative check. It is not an assessment as such.
Outcomes focuses on whether customers have received adequate information to assess whether the product or solution recommended to them has met their objectives.
This goes beyond risk to look at areas of suitability such as cost.
The FCA has signalled that it is shifting its emphasis to outcomes, encouraging firms to direct more of their resources towards achieving good consumer outcomes.
Essentially, under the FCA’s compliance, a firm must show that it has the procedures and processes in place to meet regulatory standards, including standards of individual conduct.
Undertaking regular file checks and reviews is a way of demonstrating this commitment.
How Often Should My Firm Review its Files?
For file checks and reviews to be effective, they should be regular and thorough.
We recommend a combination of annual, quarterly and ad-hoc reviews.
Periodic reviews will enable a rigorous audit of your files, and ad-hoc reviews will then help ensure your employees are consistently maintaining compliance.
What are the Possible Consequences of Not Checking Files?
The FCA is focused on improving standards for the entire financial services industry, including individual behaviour and customer service and satisfaction.
File checks and reviews can offer visibility in these areas and help ensure a firm’s employees are complying with FCA rules and regulations.
Therefore, the possible consequence of not checking files is not gaining sufficient information and insight about whether key staff and advisers are compliant or not.
As a firm you need to:
- Know your customer.
- Provide the correct type of advice.
- Make sure it is suitable for the specific customer.
- Follow the correct processes and procedures throughout.
File checks and reviews provide crucial evidence of these things. Without them, how can you be sure your firm is compliant?
Support for File Checks and Reviews
We can provide a dedicated and professional external file check and review service, to help you maintain compliance.
For more details, please get in touch.