FOS Approach on Documentation

A firm which provides investment advice to retail clients will invariably have to deal with the Financial Ombudsman Service (“FOS”) at some point in its existence. For some firms, this can be a very painful experience. This is mostly due to the fact that, irrespective of how watertight a firm believes its handling of a complaint has been, the FOS has the ability to discount everything which the firm considered was vital to its assessment of the complaint without remorse.

As a result, we have provided some essential guidance for firms to consider when dealing with the FOS.

Have a clear audit trail
A clear message to firms that will potentially be dealing with the FOS would be to ensure you have a clear audit trail. Without this, the FOS would most likely be unwilling to consider (or place significant weight on) any statements made to the contrary. In a sense, the FOS will generally take the stance: ‘if it has not been documented, then the business has no evidence to rely on’. For example, if there is no client specific documentation making reference to the charges involved in surrendering a product prior to reinvesting the proceeds elsewhere, then the FOS would tend to consider that no discussions on the matter took place.

With respect to telephone conversations or meetings held with clients, these are items which should also be fully documented. This does not mean a firm will need to make a note of every topic of conversation discussed with the client – not unless it is relevant to the service being provided. For example, if a client informs you during a conversation that they have moved house; purchased a new property; are having a child; are increasing payments for their mortgage; or that they have taken out a loan; then these are things which should be recorded as they are all instances which may affect the client’s financial circumstances and so may need to be considered for suitability purposes.

However, some firms have become paranoid about what needs to be recorded, resulting in meaningless conversations about the weather being added to client files. There is nothing wrong with recording that the client called the firm, but if nothing relevant was discussed, then nothing further need be done. Otherwise, this is simply a waste of a firm’s resources and may demonstrate that advisors do not actually know what is required of them (causing a deeper investigation by the FOS of the initial advice as well as any further conversations).

In order to avoid finding yourself in this situation, a firm should ensure that it habitually records all necessary information about a client and any discussions held with them.

Know how the product works
Another key point to note is that a firm must be able to demonstrate that it knows how a product works. For example, with an endowment savings plan, the charges that a client pays also include charges for an element of life assurance connected with the savings plan (this was required at the time in order to make the savings plan a qualified investment for tax purposes). However, a client could later argue that the advice to invest in such a plan was unsuitable due to this element of life assurance not having been explained properly to him or her at the time of sale, and/or that he or she had no need for any associated life assurance costs.

As a result, the firm would need to be able to demonstrate exactly how much the client had paid in charges in order to evidence what the corresponding reduction in yield was for the client, given these ‘unnecessary’ life assurance charges. The problem here is that a firm may not be able to ascertain exactly how much of the annual charges paid by the client could be attributed to general charges, and how much could be attributed to the life assurance element.

Without being able to provide an exact figure, a complaint could be upheld by the FOS as the firm would not be able to demonstrate that the reduction in yield caused by the life assurance charges was minimal/irrelevant – and so arguably making the advice unsuitable.

Providing information alone is not enough
A lot of firms consider that the majority of complaints against them should be rejected as the issues that the clients have complained about had all been properly disclosed in the point of sale documentation provided to their clients. Placing significance on such rationale would be sadly mistaken when it comes to dealing with the FOS.

If we take the subject of reduction in yield as an example again, let us assume that a client had been provided with a personalized illustration showing that charges will reduce the potential return from 8% per annum to 3%. This alone would not mean the firm has complied with its suitability requirements.

From the FOS perspective, any significant reduction in yield should be appropriately highlighted and explained to the client. In such cases, the FOS would expect a firm to be able to demonstrate that the client was informed of this as well as the reasons for why the investment was still deemed suitable. The fact that a personalized illustration was provided to the client showing the relevant charges would not be sufficient for a firm to defend its position.

Wide remit of the FOS
It should also be noted, the FOS will not simply investigate areas that a client has raised in making his or her complaint. The FOS has the remit to investigate any areas where it has cause for concern. Therefore, it is irrelevant if the client has only complained about charges incurred in 2009-2010 and yet the FOS also chooses to investigate the sale of the product in question which dates back to 2005, for example.

A common example where a firm will not fully investigate a complaint (and then be surprised by the subsequent actions of the FOS) is if a client has cited ‘poor investment performance’ for the reason of the complaint. Firms commonly grab hold of this reason, reject the complaint blaming poor economic conditions for the investment’s poor performance, and then refer the client to FOS guidelines where it states the FOS does not generally investigate complaints regarding poor performance of investments.

Firms are then surprised by FOS requests for information regarding the sale of the product, and view this – incorrectly – as hostile action by the FOS against the firm. As a result, time is wasted arguing over why the FOS would want this information, given the initial complaint. Time is further wasted as the firm then realizes it had not investigated all aspects of the sale in question and so needs more time to do so (which the FOS may be unwilling to grant at this late stage).

What firms should take away from this is that, even if you do not want to write to the client regarding the sale of the product when addressing the complaint, firms should at least produce an internal assessment on the initial advice to ensure there are no other issues which the FOS may later pick up on (should it come to that).

Responsibility for record-keeping
Whilst this article may give the impression that the FOS is biased towards clients, this is certainly not the case. The FOS generally takes the view that the burden of recording and maintaining documentation rests with the business. For example, whilst a client may have been provided with a copy of the disputed piece of information, the onus is on the business to provide the FOS with this documentation.

This is also partly due to a common trend with clients where they ‘no longer have in their possession’ the relevant piece of information which would demonstrate the firm carried out its suitability obligations. As there is no obligation on clients to maintain such documentation, the burden will fall on the firms.

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