The FCA says the advice industry still has some way to go before becoming a profession and should look to areas such as suitability letters for further improvement.
Speaking at the Personal Finance Society annual conference in Birmingham last week, FCA technical specialist Rory Percival said the RDR has created the “framework” for advisers to become a profession, and it is down to the industry to take the opportunity.
He said: “We have seen good progress and feel the industry is broadly on the right track but there are some areas where there is still some way to go and this will take some time.”
Percival said the regulator continues to have concerns about the structure of suitability letters, warning that they are not focused enough on client engagement.
He told delegates: “We have been saying for years that suitability reports need to be improved. In many, perhaps most, cases we see suitability reports that seem to be geared to the firm’s purposes as a defensive measure from potential claims from the Financial Ombudsman Service, rather than designed to communicate with clients.
“We continue to find them to be too long, poorly structured and unengaging. It would be professional for letters to be written in a way that encourages clients to read them.”
When asked why suitability reports have become so long and technical, Percival said there are many “myths” about the regulator’s expectations.
He said: “Whether it is compliance consultants or firms generally, there are a lot of perceptions of what we expect that are not based on fact. There is a big challenge for us in communicating better with the industry and that is something we are very mindful of.”
Percival shared a number of examples of best practice with delegates, including getting structured feedback from clients on the firm’s business model and keeping a “non-business” register.
He said: “First of all, business models should be geared around clear consumer need and not just what firms have always done.
“So perhaps getting client input into that process – some firms have a client committee or forum.
“Some advisers say ‘I have been dealing with my clients for 10 years – I know them very well’. I’m sure that is the case but I’ve also talked to a lot of advisers who have gone through an exercise of speaking to their clients about what services they want and value, and every single one has said it was a really useful exercise and they learned something new.”
Percival said one suggestion for demonstrating suitable advice is to keep a register of occasions when the firm has recommended the client keep their existing investments where they are.
He said: “The idea there is the client has come to you for your expertise and what they are trying to buy is peace of mind. That can just as easily be achieved by you saying ‘everything is fine where you are’ as it is by recommending a new investment solution. Clients value that peace of mind and will pay for it.”
Percival also suggested testing out disclosure material on non-advisory staff to ensure it is engaging and easily understood by consumers.
“Perhaps you could talk through the suitability report with the client and ask what they understand by the recommendations you are making. If there are areas they struggle with, that will be a flag for you to revisit that area. The same approach can be taken with risk-profiling questionnaires by asking the client if they have understood the questions.
He explained: “We do not expect everybody to be doing all these things. The question is to what extent are you demonstrating professionalism and putting these kinds of things into practice.”
Percival said there are a number of indicators that will demonstrate when the industry has become a “true profession”.
He said: “First and foremost, advisers will have gained the trust of consumers, and I would suggest that for this to happen, enforcement cases may need to be more occasional events than regular events as they are now.”
Other indicators include a continued move towards higher qualifications and a further move towards charging structures that are not contingent on a product sale.