Documents released by the FCA shed light on how the regulator has assessed IFAs in its advice suitability review.
Notes from a two-day file review training course released under the Freedom of Information Act show how the FCA wants file reviewers to check both suitability and disclosure requirements.
Among the guidance given by the FCA is that high charges don’t necessarily mean advice is unsuitable.
Under the heading “High adviser charges” the FCA notes that “so long as adviser charges [are] disclosed clearly then [it is] normally up to client to agree/decline and not a suitability issue.”
The exception, it says, is in so-called “self-defeating transactions”.
Outcomes, not process
The regulator lists two key questions under a section called “Outcomes, not process”. For suitability, this is “has the client ended up with the right solution”, and for disclosure, it is “have the required disclosures been made and is the client likely to understand (i.e are the communications clear, fair and not misleading.)”
The FCA lists six generic measures on which firms could have failed on suitability, including where the client has been recommended a solution that does not match their timescales, where the client has been recommended a solution where there is a need for ongoing reviews but this is not explained, offered or put in place, or where solutions do not take into account the client’s tax position.
There are five generic ways in which firms could have failed on disclosure, including failing to provide initial disclosure of services and charges, not providing enough detail about products, and failing to provide an adequate suitability report.
Firms judged as “uncertain” on disclosure did not need to have committed a rule breach, but could have been judged because they did not provide some disclosure material for review.
The FCA also notes that “poor disclosure does not automatically result in unsuitable advice”.
Under Rule 4, the trainer asks reviewers to “Keep it balanced” with “balanced judgment and “balanced comments”.
FCA file reviewers are also told to not be “judgmental about a client’s objectives” and are reminded that there is “no perfect solution”.
The regulator also provided some good practice examples to file reviewers of how their feedback should be presented.
For example, for the feedback: “I’ve rated this as unsuitable as the risk level of the investment does not match the client’s ATR and term of investment. There were also problems around the additional costs being incurred by the new scheme”, the regulator’s good practice would be to spell out the reasons why the client’s recommendation did not match their ATR and to provide more detail on why incurring costs would have been unsuitable in this case.
The regulator suggested phrasing such as: “I’ve rated this as unsuitable as the risk level of the investment does not match the client’s risk profile. The answers to the risk profiling questionnaire clearly indicate this is a cautious client and this is supported by the client’s existing investments. The fund recommended meets the firm’s definition of medium risk. It is also unclear in relation to additional costs – the existing fund appears to be meeting the client’s needs and objectives and it is unclear what additional benefits the additional costs bring.”
Insistent client advice
Under a slide headed “Pension freedoms 2” the regulator acknowledges “clients can be irrational”.
When it comes to insistent clients, who wish to transact against advice, the FCA reiterates its guidance for advisers:
- Give a suitable recommendation
- Clearly explain the risks of the alternative course of action
- Flag that the client is acting against advice
The toolkit presented in the training for assessing the suitability and disclosure of investment advice did not apply to discretionary fund management, drawdown or occupational pension scheme transfer guidance.