Half the questions on the advice process in R01 come down to knowing what has to be said, written or kept, and when. It is unglamorous learning, but it is reliable marks because the rules do not change much from sitting to sitting.
Client categorisation
Before anything else, a firm must decide what kind of client it is dealing with, because the protections follow the category.
| Category | Protection level | Access to FOS and FSCS |
|---|---|---|
| Retail client | Highest | Yes |
| Professional client | Reduced | FOS only in limited cases |
| Eligible counterparty | Lowest | No |
Professional clients are either per se, such as authorised firms and large undertakings, or elective, where the client asks to be treated as professional and meets a qualitative and quantitative test. The firm must warn the client in writing what protections they lose. A retail client can never be reclassified simply because they are wealthy or confident.
Initial disclosure
Before providing a service the firm must tell the client, in good time:
- Who the firm is, how it is authorised, and how it can be contacted
- Whether the advice is independent or restricted, and if restricted, the nature of the restriction
- The scope of the service, including whether it is one off or ongoing
- The cost of the service and how it is paid
- How to complain, and that the client may have access to the Financial Ombudsman Service
- The compensation available from the Financial Services Compensation Scheme
Independent advice requires an unbiased and unrestricted assessment across all relevant retail investment products from the whole of the market. Restricted advice is anything narrower, and the firm must be clear about it in the same disclosure and in any subsequent communication.
Adviser charging
Commission on retail investment products is gone. Charges must be agreed with the client in cash terms or as a clear formula, disclosed before the service, and reflected in a personalised illustration. Ongoing charges are only allowed where an ongoing service is genuinely provided, and the client must be able to cancel it. Where the charge is taken from the product, the client still needs to see the amount in pounds.
The fact find and know your client
The obligation is to obtain enough information to be sure a recommendation is suitable. That means:
- Objectives, including timescale and priority
- Financial situation, including income, expenditure, assets, liabilities and capacity for loss
- Knowledge and experience of the product type
- Attitude to risk, and the difference between willingness and capacity
- Health, family and employment circumstances relevant to the need
If a client refuses to give information the firm needs, the firm must not proceed with a recommendation that relies on the missing information. It cannot simply note the gap and carry on.
The suitability report
The report must explain, at a minimum:
- Why the recommendation is suitable for this client
- The client demands and needs it meets
- Any possible disadvantages of the recommendation
- The cost, and any product specific risks
Write it for the client rather than the file. In exam scenarios the failure is usually one of two things: a report that lists product features without linking them to the client circumstances, or a report that omits the disadvantages.
Execution only and insistent clients
An execution only sale involves no personal recommendation, so there is no suitability requirement, but the firm must still act honestly and record that the client did not ask for advice. An insistent client is different. They receive advice, choose to do something else, and the firm must set out the advice given, make clear the client is acting against it, and record the reasons the client gave.
Cancellation rights
| Product | Cancellation period |
|---|---|
| Life policy or pension contract | 30 days |
| Pension transfer or opt out | 30 days |
| Most other retail investment products | 14 days |
| Distance contracts for non life products | 14 days |
Cancellation gives a right to withdraw, not a guarantee against market loss, because the firm may deduct any fall in value for single premium contracts.
Record keeping
Records must be capable of being reproduced in English and must show the firm complied. Learn the three headline periods: indefinitely for pension transfers and opt outs, five years for MiFID business and for records supporting a personal recommendation, and three years for most other non MiFID business.
Making it exam ready
Build a single page that runs the client journey from first contact to ongoing service, and write the required disclosure, the required document and the retention period at each step. Nearly every process question in R01 is a request to place a fact somewhere on that journey.