If someone in your company has a dialogue with a client by email, telephone or letter, would you know what was said or agreed?
At RWA, in common with other compliance specialists, we have a little black book of horror stories which have been gathered over the years. Flipping through them creates mixed emotions, but there are very good reasons for this record to exist.
In the first place, most practitioners are not exposed to serial under-performance in the context of negligence and it is something that may only arise on a handful of occasions in the working life of a professional adviser (if at all).
It is necessary to keep a good record of what can go wrong so that the examples of mistakes and incompetence can be given in assessment and training.
On the other hand, there are many things that are being done which are just a disaster waiting to happen, so once again the good example of bad practice can help practitioners identify aspects of their own businesses that might need to be addressed.
Here is an example of an exchange of emails:
Client: “That questionnaire you sent me has a question about heating appliances… We use paraffin heaters at present, does that matter?”
Broker: “Oh don’t mention that…they will only want to increase the premium.”
You might well ask whether this sort of thing actually happens. Unfortunately, the answer is a resounding ‘yes’. There are many such examples of such crass negligence, but to justify our positions as compliant individuals, readers need to able to know how to identify if it is going on in their firms.
Perhaps in looking at a simple example such as this, it becomes clearer to us why the FCA will seek evidence of a system that identifies such shortcomings before disaster strikes. In the case above there was a claim and the insurer avoided it for non-disclosure.
How do you think you would spot this in your own firm within a reasonable period?
Clearly, the answer is through supervision and monitoring. But imagine if this dialogue took place in other ways - letter, telephone, face-to-face – and consider how you might set up a procedure to identify similar dialogues.
Perhaps the first thing you should do is insist that all such dialogues are committed to writing, dated and signed.
Now you need to set up a monitoring procedure that satisfies the following:
- Who does the checking?
- What do they look for?
- How often?
- How are the results recorded?
- Who monitors the results and checks that the procedure is being complied with?
To help get to grips with this issue, I would like to conduct an exercise; the first part of which is to take a blank sheet of paper and consider just one aspect of giving advice, namely, gathering information.
Set down a procedure of checking this function within your firm and concentrate on the middle three bullet points above. As a hint, it will all follow from identifying what you are looking for and, in principle, you want to avoid:
- A surprise when a claim arises
- Any unreasonable stress for the customer
- Being unable to show a third party what you have done or what went on between your firm and another party
You may be able to develop a system that identifies a problem, but you also need to be able to identify why it occurred in the first place.
So let us move on to the second part of the exercise. Assuming that we have developed a system to check what goes on and that having chosen a reasonable interval between checks to minimise the risk of a problem occurring, what do we do if we spot evidence of incompetence as highlighted above?
Clearly, we have identified a training need (does this individual know anything about the duty of disclosure?), but if we are running an FCA-compliant business we need to go a step further and identify how this incompetent person got into a position of giving advice.
What could have gone wrong? This is one of the reasons that the FCA is keen on laid down procedures. In this case, no harm was done but supposing there had been a £10m loss which the insurer had repudiated?
We need to be able to track this individual’s progress through the firm right back to recruitment if necessary:
- Is it possible this person lied about experience or qualifications?
- Was a knowledge assessment fudged?
- Was the competence assessment system generally flawed?
- Should this person have been dealing with a customer without consent and direct supervision?
Looking again at your sheet of paper, pretend that this had happened at your firm and treat this as a risk management exercise.
Is it possible that this could have happened in your firm? Be brutally honest with yourselves. Consider what procedures you would put in place to make reasonably sure that it could not happen again.
Finally, I would like you to go through another case, without comment from me.
On checking files we found that three staff arranging household insurance (often for the directors and partners of important commercial clients) had, for the last few years, been adding buildings insurance to the contents insurance for flats owned by customers.
It was spotted when a compliance auditor noticed that there was a buildings item on a 12th storey flat in a London high rise. There was no other detail of any other insurance on file.
The exercise is the same. Could it happen in your firm? Consider that the error might be inadvertent. How could it happen and how do you stop it?
So you see, the black book of horror stories does have its place. Imagine that these scenarios had occurred in your firm and consider what action you would take.