As with the Fact Find document covered in Part 1 of this blog series, limited regulatory and legislative guidance is available regarding the use of file notes during the advice process. Every organisation should put in place a good document/file notes creation and retention policy and ensure that all representatives are properly trained.
What is clear, however, is that many advisers fail to use file notes effectively as part of their adviser / client relationship, which places the advisers and licensees in a highly vulnerable position should a dispute subsequently arise.
A Financial Ombudsman Service (FOS) publication in 2012 – “Top 10 tips for financial advisors” – emphasised the importance of contemporaneous file notes documenting pertinent client interactions and events. Given FOS’ role as an independent dispute resolution body for consumers and financial service providers, its guidance provides a compelling basis on which to run the advice process for advisers and licensees.
What are “Contemporaneous File Notes”?
By observing two key aspects to file noting, advisers and their licensees can put themselves in a stronger position in the event of a dispute.
- Ensure There is a File Note
In our adviser audit experience, advisers often fail to prepare file notes to document their interactions with clients, despite file notes creating a clear paper trail of their adviser / client relationship. A common misconception exists whereby file notes (if used at all) are regarded as necessary only during the initial stage(s) of the advice cycle.
In fact, advisers should ensure that pertinent contents of all interactions with clients are appropriately documented via file notes, irrespective of whether this was done via a telephone conversation, a face-to-face meeting or email / fax correspondence.
In determining what constitutes “pertinent contents”, an adviser should exercise their own judgement and capture critical details that may be the subject of future disputes. File notes may be useful in documenting the following (note that this list is not exhaustive):
- The client’s reason(s) for seeking advice, including any stated goals and objectives as well as areas of advice that the client wanted to exclude;
- The client’s personal details (such as income / expenses, assets and liabilities);
- What the client’s assessed risk profile is (any client reservations that may have been expressed should also be documented); and
- Any product / strategy preferences (or detracting features) communicated by the client.
File notes should represent succinct and accurate records, so bullet points should be used where possible and “clutter” should be avoided. Not only would this assist the adviser in later recalling pertinent details; it would also assist third parties who may scrutinise a client file (eg ASIC and FOS). It is strongly advisable to double check that file notes have been taken accurately and that the information captured about a client is consistent.
- Create the File Note as soon as Practicable
Another common issue identified during past adviser audits is the failure by advisers to create a file note within 24 to 48 hours of the relevant client interaction.
Whilst there are no specific guidelines on when a file note should be raised, it is clear that a file note created on the same day is more likely to be regarded as “contemporaneous” than one that is raised days or even weeks after the relevant interaction. The longer the delay in preparing a file note, the more likely it is that an adviser may forget pertinent details. Licensees should ensure that their file note procedures do not allow amendments to file notes, but facilitate additional information to be inserted later for clarification. Such additions should reference the original file notes.
To facilitate potential audits and surveillance visits, advisers must be able to promptly retrieve their file notes, thus making it imperative for them to be securely retained.
In short, advisers should:
- Create the necessary file notes as soon as practicable, preferably within 24 hours.
- Number and date all pages consecutively and accurately
- Securely retain all file notes
The importance of creating succinct and contemporaneous file notes within the advice process cannot be overstated. Irrespective of an adviser’s competing demands on their time, the effective use of file notes can mean the difference between a disgruntled client being compensated for potentially significant losses and an adviser successfully defending themselves. In more extreme cases, it can impact on the regulatory action taken by ASIC and – by extension – potentially the subsequent decisions by the judiciary.
Know Compliance can assist with developing company document creation and retention policies and setting up files and folders on the system in an orderly manner. Please contact us on (03) 9689 1186.