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Kim North: An FCA faux pas on suitability

Kim North

“You have brains in your head. You have feet in your shoes. You can steer yourself in any direction you choose. You’re on your own, and you know what you know. And you are the guy who’ll decide where to go,” said Dr Seuss. I was reminded of this recently in light of the news that a number of successful advice firm owners have decided to go down the restricted route.

Standard Life’s 1825 restricted offering looks appealing to many as it is becoming harder to survive as an independent financial advice firm. Finances are being stretched, with constantly rising professional indemnity and regulatory costs.

But surely we should want life to be easier for IFAs? After all, research shows time and time again that people receiving independent advice end up financially better off than those being sold bank products or doing it themselves.

I have always believed the Financial Services Compensation Scheme levies should be priced in relation to the number of upheld complaints, and an indication of its amount should be notified months before payment. I know a few larger firms have received unexpected demands for millions of pounds to be paid within just six weeks. Many of these firms have just a handful of complaints dealt with by the ombudsman or the compensation scheme.

FCA director of supervision Megan Butler said last week that “firms must not think the absence of customer complaints means no problem exists. Wealth management firms are taking unnecessary risks with customers’ capital and need to up their game.” This follows the thematic report on suitability published last December.

The suitability requirements in the regulator’s Conduct of Business rules seek to ensure that, where firms provide investment advisory or portfolio management services, they obtain enough information about their customers to be able to act properly for them, and that the business conducted for their customers, or on their behalf, is appropriate to their circumstances.

Failure to obtain all the relevant information, or evaluate it properly, can lead to the recommended transaction or decision to trade being unsuitable.

I recall a time as an IFA the year before Lehman Brothers collapsed in 2008. After a five-day regulator visit to trawl through client files I was written to, as the compliance officer, because I had advised on an investment into a well-known with- profits fund.

The follow-up regulator’s letter said I did not know my client and the recommendation was not suitable as with-profits investments were opaque and therefore did not treat clients fairly.

Ten years later when the with- profits fund had outperformed most asset classes I laughed with my client as she took the proceeds. After all, the client I “did not know” was my beloved mother, who was very happy with the lack of volatility over one of the worst stockmarket 10 year periods.

Investment suitability changes year on year, as do the major asset classes. Let’s hope the FCA takes this into consideration when looking at advisers’ investment recommendations.

Kim North is managing director at Technology and Technical 

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Comments

There are 12 comments at the moment, we would love to hear your opinion too.

  1. Ah but Kim, we’ve been told the adage for aeons it seems, that if it’s not written down it didn’t happen. So clearly your mum actually isn’t! – a bombshell I know and I’m sorry to bring you this shocking news. And all because Regulatory Rules trump the Law of the land. And isn’t it a great job to just sit there and criticise other peoples work? I am pleased that your unsuitable advice and unfair client treatment did well for the woman previously known as your mother. Don’t suppose you got any form of apology from E14? What remedial action did they expect you to take at the time out of interest?

  2. Opaque?!

    For an employee of the (then) regulator to have described with-profit funds as opaque and unacceptable, given that they were within a ‘regulated’ product just about sums it all up!

  3. Soren Lorenson 23rd May 2016 at 12:51 pm

    Hi Kim, Just because your mother was happy with the result doesn’t mean that she shouldn’t have complained about the advice you gave. Maybe you just got lucky. Therefore your firm should be paying the same FSCS levy as everyone else because you are probably just as bad, you just haven’t been found out yet.

    Back in the real world, a firm with no upheld complaints, recommending cautious products to regular investors should, of course, not be paying the same FSCS levies as those firms that are selling UCIS to old ladies. Sadly, if the FSCS actually charged these firms proportionately to the risk they pose the scheme would fall over as they would be bankrupt before they started.

    Maybe the FCA could have a think about this and remove FSCS protection from high risk products so that regular investors are not paying for the sins of others.

  4. No doubt Kim should have recorded who her mother was at the very moment of her birth!

  5. James Hurdman 23rd May 2016 at 1:46 pm

    If the regulator believed (or believes) that with-profits investments are opaque and do not treat clients fairly, why haven’t they taken any action? Isn’t that what regulation is?

  6. Graham Bentley 23rd May 2016 at 2:42 pm

    Something of a non sequitur going on here, Kim.

    Your Mum’s experience aside, the initial implication is that it’s a pity advisers are joining the ranks of restricted advice, supported by “…research shows time and time again that people receiving independent advice end up financially better off than those being sold bank products or doing it themselves.”

    Does that research demonstrate independent advice makes people better off than restricted advice? Restricted advice doesn’t equate to bank products and by definition isn’t about DIY.

    I suspect there is a significant body of the MM readership operating to the highest standards, while operating in the restricted arena, that might feel a little aggrieved at the implication.

  7. …..”The follow-up regulator’s letter said I did not know my client and the recommendation was not suitable as with-profits investments were opaque and therefore did not treat clients fairly…..”
    This totally sums up the skill-set of the FCA in one sentence. You have unqualified people passing judgement on an area they clearly know absolutely nothing about. So much for Hector Sants rebuttal of the FCA supervisors not needing to be at least QCF level 4 qualified as their skill set is a different one to that needed in advising.
    Still this is what happens when lunatics are working in & running the asylum

  8. Very true Kim. An old friend in the business said when giving advice she had two tests. ‘The mother test’ – would you sell this to your mother? And the ‘black robe test’ – how will you explain it to the judge?

    It seems you have passed the first with flying colours!

  9. Crumbs. So I wonder if they also view the following (currently available) investment as “opaque and not TCF”:
    Almost all the investors have no idea where their money actually goes and what it is being invested into, which can include some high risk ventures withouth their knowledge
    The difference between what the provider makes on the money and what it pays the client (ie the charges?) is probably over 75% of the total return the provider makes
    The provider can also change what they pay the investor at any time – although clients can then vote with their feet (tho not many do, inertia probably)
    The provider almost certainly has nowhere near enough liquidity to repay ALL the investors if they did want their money out

  10. I have always found it hard to come to terms with a regulators high-handed opinion, based purely on bits of paper. One cannot be expected to write a War & Peace tome for every client and/or recording what may well be several hours conversation (and then retrieving salient parts) is also a mountain. Not to mention what poof do you have that the voice actually belongs to the client?

    It just isn’t possible for them to arbitrarily decide that we don’t know our clients. Many of us have had happy and satisfied clients for ten years or more, while these bureaucrats were still in short trousers.

    I’m afraid these bureaucrats need on occasion to do the obvious – ask the client “Are you satisfied?”

    No doubt if they receive an affirmative answer they will tell the client they are wrong.
    Franz Kafka couldn’t have made it up.

  11. Your inference that restricted advice is limited to “Bank” advice indicates you have a restricted understanding of what constitutes restricted advice.

  12. Can I ask Kim, if you asked said FSA author to your letter, what qualifications or experience they had to conclude such a verdict ?

    I only ask because being in the same situation (nearly) myself, I did ask the reply was as follows-: I doesn’t matter what, qualifications or experience, I have, as I am reading this suitability letter from a clients perspective, (in a curt tone), besides I used to work some years ago for a life company, and know full well of what you advisers get up to ! When (at the end of a very stressful day) all was concluded I was told I would have to do a skilled persons review on 10 files, I then asked did you read and understand all the supporting documentation held electronically, to this the answer was, the suitability letter is a stand alone document and its not my job to go looking through your computer !

    I short I was made an example of, in a visit, I now believe, where the outcome (to a large extent) was pre-planned

    If you are wondering, yes the files were past as suitable and yes it cost me thousands, and yes I did lose a big part of my sanity !

    To top all this, in the follow up letter, it was well documented I was forbidden to show any correspondence or talk about this enforcement case to any third party (except the firm doing the skilled persons review) with out the FSA’s express permission !

    “if you do nothing wrong, you have nothing to be scared of” …….yeah right, like any-one believes a word what comes out of Canary Wharf !

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