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