Getting to Know the ‘Know Your Customer’ Rules

Here, we take a look at the ‘know your customer’ rules, focusing, in particular, on investment objectives – useful reading for the CII’s CF1, R01, R02, R06, AF4, and AF5 exams.

This article is correct as at 1 March 2024.

Know your customer

To meet the FCA’s ‘know your customer rules’, an investment adviser must ensure that they have collected all the necessary information about a retail client to make a recommendation to them. This is usually achieved by taking the client through a fact-finding process to establish the client’s:

• current financial situation,
• investment objectives, and
• priorities

Current financial situation

As with any advice areas, the adviser will need to confirm general facts about their client, including their relationship status, domicile, state of health, dependants, and the client’s employment status, which will highlight any possible employee benefits, for example, death-in-service benefits, income protection, or private medical insurance.

Next, they need to ask questions about the client’s financial details, such as their assets and liabilities as well as any existing protection or savings policies – this is important as any policies the client already has will need to be taken into account when making any further recommendations.  Pension provision the client has is covered here, as well as information on their monthly income and expenditure.  This will highlight any overspending as well as any surplus. 

Investment objectives

An adviser will need to establish their client’s risk profile, as well as the purpose of the investment and the period they wish to hold it for.

The adviser must ensure the client fully understands any risk surrounding any investment they recommend.  As part of this process, they should gather information on the client’s previous investment experience and the reasons for their current holdings. This information can help determine whether the client can understand the complexity and risk of their intended recommendation.

Risk profiling is a vital part of the fact-finding process, and an adviser would normally refer to a recommendation being consistent with the client’s risk profile and the client’s general understanding of what risk is.  A client’s capacity for loss must be established as well as whether they have any views on socially responsible investing.

Knowing the purpose of the client’s investment is crucial. In addition to helping understand the client’s motivation for investing, it can support the adviser in determining how much needs to be invested, the return required, by when it is required, and whether their client will need access to their capital or an income from their investments in the future.

It is crucial, of course, that any recommendation is affordable and that its suitability is fully discussed.  This would include the tax treatment, the fact it’s satisfying a client need, its affordability, and the term of the product.

If a client has very unrealistic goals, these need to be negotiated to make them realistic. In other words, the adviser’s role is to identify the client’s main needs and prioritise them with the client.

Priorities

PIPSI – Protection, Income Protection, Pensions, Savings, and Investments – can be used to help educate a client to prioritise their financial planning needs efficiently.

Clearly, investments is at the very bottom of the PIPSI list.

While an adviser may establish gaps in other higher-priority financial planning need areas, such as income protection or saving for retirement, the client may not wish to deal with those needs at this point. If the client wants to proceed using their own order of priority, the adviser should make a note of this on the fact-find.

Grab the resources you need!

Prepare for your CII R01 exam with confidence! Ease your nerves by trying out a free taster of Brand Financial Training’s mock exam papers. Download the R01 mock exam taster now and get a glimpse of what to expect. Click the link to get started!

Alternatively, you can download a taster for CF1, R02, R06, AF4, or AF5 if you’re studying for one of those exams.