How Adviser Firms Can Improve Their Compliance Risk Management Process

How confident are you in your adviser firm’s compliance capabilities? In this blog, we explore the compliance challenges firms face, how you can mitigate risks and top ways to improve your compliance risk management process.

Compliance is a key priority for firms and an inevitable reality for financial advisers, but meeting regulatory compliance requirements consistently can be challenging. However, through an optimised and comprehensive compliance risk management process, you and your firm can lighten the load of regulatory obligation, provide clients with suitable advice and the best financial plans, and streamline your overall processes. 

What are key compliance challenges advisers face?

Industry developments such as FG11-05 for risk and recommendation suitability, COBS Handbook for delivery requirements, and other constantly evolving FCA papers make maintaining compliance a complex challenge to financial advisers and firms. Ensuring all concerns are adequately addressed means firms need to bear several factors in mind throughout their compliance risk management process.

In terms of financial planning compliance, advisers need to ensure that:

  • Their forecasts are fair, accurate and not misleading
  • Their clients can understand the results 
  • They can show that clients have benefited from the advice and that value for money has been provided 
  • They can demonstrate that their clients’ objectives have been met by the plan set out

Additionally, when it comes to suitability, it’s vital that firms:

  • Check capacity for loss in a standard way, across advisers 
  • Ensure a client’s attitude to risk is captured and discussed consistently by advisers
  • Match the suitable investments to clients, taking into account the objectives of the client and their risk tolerance and capacity for loss

At its core, ensuring consistency across advisers and their processes, showing the suitability of advice given and that it meets client objectives and circumstances, having a good audit trail for decisions made, and avoiding bias are all necessary for robust financial compliance. Therefore, firms need to ensure these factors are accounted for at any point in their compliance risk management process.

How adviser firms can mitigate and manage compliance risks

To identify, mitigate and prevent risk, a firm’s typical compliance risk management process includes documented processes that stipulate rules that inform how advice should be delivered to a client. Depending on the firm’s size, the process is usually driven by a compliance manager and overseen by either external compliance consultants or a dedicated internal team. It can include insights from heads of advice and the advisers themselves. From first client contact through to advice implementation, the process outlines what exactly needs to be covered in the advice offered by a firm’s advisers. 

From a technical perspective, software solutions and compliance risk management firms help firms optimise their processes and verify their compliance. Many of them are now starting to use AI to review cases and check the level of compliance demonstrated. These are often worth considering to help streamline compliance management. And making use of integrated systems at all stages of the advice process, from onboarding through to the implementation of products and funds, will significantly reduce compliance risks and mistakes. 

Remember that your compliance risk management process is not static

It’s important to view compliance and risk management as a fluid, ever-evolving process, not a “one and done” exercise. With new regulatory announcements and updates being made regularly, reviewing your compliance process is an ongoing task, and checks must be carried out frequently. Some updates need to be incorporated more quickly than others, so we recommend weekly reviews. Ensuring a feedback loop from implementing the process back into any updates from your firm’s paraplanners and advisers is also useful. 

3 steps to improving your compliance risk management process

Due to the risks associated with non-compliance, such as fines, advice permissions being revoked and bad publicity, ensuring an optimised risk management process is high on advice firms’ lists of priorities. When looking to reduce risks and improve compliance, it’s important to remember to follow the rules set out by regulators and understand the implications of Financial Ombudsman Service (FOS) decisions on the advisory process. Internally, there are a few steps you and your teams can take to improve your compliance risk management process, outlined below. 

1. Simplify through technology

Software solutions are beneficial to the compliance risk management process and help ensure that the latest financial regulations are accounted for and implemented consistently across your firm. Because compliance is complex and has many factors at play that could go wrong at any time, leveraging technology in Financial Services reduces your risks of non-compliance.

2. Don’t forget due diligence 

Whether you’re selecting a software solution to implement or drawing on the support of an external provider in your advice process, it’s crucial to do due diligence to confirm your processes are robust and follow relevant guidance and rules. Although the support of technology and compliance experts can help improve your efficiency, your compliance team is still ultimately responsible for ensuring your firm is meeting regulatory obligations. It’s a collaborative effort.

3. Keep an eye on regulatory updates

Because of the fast-changing nature of regulatory compliance, a key part of risk management is keeping your firm’s finger on the pulse and continually monitoring any updates to ensure your processes stay up to date. Reading relevant FCA publications and checking that each area discussed is covered somewhere in your processes is a necessary step to making sure your firm keeps abreast of the changing regulatory landscape without running into any problems.

Other things to keep in mind when reviewing your compliance process include:

  • Ensuring any previous advice isn’t seen as non-compliant when new changes are made
  • The trade-off between implementing new systems to reduce risk and the time and cost implications of doing so
  • Not confusing clients with significant changes in plans
  • Prioritising the changes that make the most difference, but require the least amount of effort, first
  • Ensuring your compliance, advice, and IT support teams are properly primed to drive any improvements needed

Sustaining and future-proofing your compliance risk management process

Sustaining your compliance risk management process can be significantly improved by adopting software solutions that can help future-proof your process, no matter the state of regulatory requirements. When exploring possible solutions, opt for those with functionality that support the suitability and planning of financial goals for clients. 

Financial planning solutions like EV’s end-to-end planning tool, EVPro, offer specific capabilities that help support compliance, like:

  • Risk questionnaires to accurately identify a client’s attitude to risk
  • Risk profiling of funds and portfolios to ensure they’re suitable for clients’ level of risk
  • Capacity for loss calculations based on cash flow and probability
  • Planning forecasts that account for the tax to identify better outcomes for clients
  • Robust stress tests to ensure plans will succeed even if a factor performs badly
  • Identifying the best combination of funds to suit a risk profile, beyond merely mapping asset allocations
  • Overviews of all cases to ensure plans are on track

Additionally, EVPro uses consistent descriptions of methodologies for risk ratings of funds/portfolios and uses a stochastic forecasting model for probability to help ensure clients’ expectations are set correctly.

Summary

Although a thorn in the side of any adviser firm, meeting compliance requirements is a necessary part of financial planning and management that ensures advisers and clients are protected. Having a robust compliance risk management process in place can help your firm manage compliance effectively, but optimising this process using a holistic financial planning software solution, carrying out regular reviews and keeping a close eye on regulatory developments can make compliance responsibilities that much easier. 

So what next?

If you’re interested in how technology can help optimise your advice process overall, look at our Guide to Modernising Your Financial Planning Advice Process and Technology. This handy resource sheds light on the modern financial planning process and how you can start future-proofing your processes.

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