The FCA’s recent suitability review highlights an improvement in terms of client recommendations. But firms cannot afford to get complacent, with the results also showing that evidencing suitability remains an issue for many.
As well as ensuring a comprehensive audit trail and clear, jargon-free reports, other areas should be considered to ensure regulatory expectations are being met:
1. Replacement business and the use of CIPs
The main focus for the FCA is on customer outcomes. In instances where a centralised investment proposition has been used, or where a recommendation is reliant on a switch, it is important to clearly demonstrate how this arrangement is aligned to the clients’ specific needs and circumstances.
2. Over-reliance on risk-profiling tools
Many firms rely too heavily on risk-profiling tools. These tools alone are not enough to determine the appropriate level of risk. A robust attitude to risk assessment should also take into account personal circumstances, attitude to risk, knowledge and experience, as well as sense-checking the outputs of any tools used.
3. Order-taking versus advice
Clients are more likely to make financial decisions based on emotional drivers. This requires an understanding of such drivers and, where appropriate, challenging them to ensure positive outcomes.
4. Inadequate disclosure
Many firms fail to clearly disclose information relating to charges and attitude to risk, such as defining charges in sterling and percentage terms, and fully justifying key recommendations in a way the client is likely to understand.
Andy Sutherland is managing director, advisory services, at TCC