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Delivering what the FCA expects on advice suitability

Simon Collins

There has been a lot of talk in recent months about the much-maligned suitability report. As compliance with ever-increasing regulation has made its way up the risk agenda, these reports have trended towards tome-like publications authored as a defence mechanism from potential complaints, rather than designed to deliver effective communications with clients.

If we consider suitability in its wider context, we should look at the definition in closer detail. The Oxford Dictionary states it as “the quality of being right or appropriate for a particular person, purpose or situation,” which seems entirely reasonable. Overlay the FCA factsheet Suitability Reports for Investment advisers, and common sense prevails.

Indeed, the FCA expects those that prepare suitability reports to explain to the client how and why the recommendations meet their needs and personal goals. They should be clear, fair and not misleading, which aligns with principle 7, “communications with clients”.

Then there are the regulatory experts that have enhanced our understanding at industry events. According to the regulatory hand-book there are three things that must be included in suitability reports:

  1. Specification of the client’s demands and needs: “The client objectives”
  2. Why the recommended transaction is suitable for the client having regard to the information provided: “Know your client”
  3. An explanation of any possible disadvantages of the transaction to the client: “The relevant risks involved.”

The FCA has previously suggested a suitability report generally need only contain these three elements but does acknowledge more complex advice would require more specific and detailed content.

So, what does this have to do with the advice itself? Well, no matter how clear the language of the report or how detailed the explanation of the costs, charges and potential penalties attached to the recommendations, if the basis of the advice is fundamentally flawed, then the advice will be unsuitable. In this case, if a complaint arises at some point in the future, the suitability report becomes a key element in the expensive process of review to determine whether the customer suffered detriment.

The FCA recently produced a discussion paper where it stated effective communications play a fundamental role in helping consumers make informed decisions or empowering them to make the right choices. Recognising that information itself does not necessarily empower the customer, the FCA work on behavioural economics has shown it can overwhelm, confuse, distract or even deter people from making effective choices if presented in a way they struggle to engage with.

The regulator concluded that consumers often fail to make good decisions about financial products and services, considering:

  • Behavioural biases, low levels of financial literacy and the complexity of some financial services and products can limit people’s ability to take appropriate action
  • Firms tend to use financial and legal jargon, which can make the materials they produce lengthy and impenetrable for the consumer
  • In some firms, marketing material is much more customer focused than other customer communications.

The discussion paper then turns to culture. The regulator expects all firms to embed an organisation-wide culture, where the importance of communicating effectively with consumers is recognised and prioritised.

Now it seems like we are finally moving towards the root cause of the suitability issue  – culture. No amount of consumer-centric information will disguise unsuitable recommendations, where the consumer is fully informed and understands the detail involved, including the risks associated with the recommended transaction.

Where firms have developed a research-based advice approach, know and understand the target market for whom their services are generally suitable and define their culture through leading by example, clients should get advice that is suitable and meets their needs, and will willingly pay the fee.

Well-researched advice based upon detailed KYC should ensure customers remain satisfied with the advice they receive. Matched and supported by a proportionate “quality” monitoring programme and effective spans of control, advice suitability should be something considered a given in a firm committed to doing the right thing and truly putting clients at the heart of what they do. This should be the minimum acceptable standard for any professional firm.

Simon Collins is managing director, regulatory, at Eversheds Consulting

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. A sensible article by Simon, and all I want to add is some “history”. In the early 1990s I chaired the “disclosure task force” of regulators which, among many other things came up with the idea of the suitability letter (originally called “reason why letter” – until the FSA decided it wanted to rebrand the document). To be precise, the task force noted that some of the good IFA firms around at the time used to send clients a follow-up letter summarising the advice given to the client. We thought this was a good idea and so it was introduced as a reglaltory requirement for all firms but with a particular eye on safeguarding against mis-selling by the direct salesforces of insurance comapanies and bank staff. Although principally a protection for the client we also had in mind that it provided some protection for firms as it gave the opportunity for sorting out at the outset any serious misunderstanding between client and adviser either about the client’s circumstances or about the advice given.

  2. Any SL of more than say 10-12 pages just confuses the customer.

  3. I agree with David Bennett, and I recall that when at the PIA I tried to get SLs reduced to the one or two pages of the IFA letters on which the SL was modeled. Unfortunately over the years SLs have become of a bit of a game between the regulator and the regulated. So, now the entire fact find gets regurgitated and options that were rejected are explained as well as what course of action was actually recommended. That way both sides attempt to cover their arses What has got lost in all of this is that the SL were intended as a means of simple communication with the client – not a private dialogue between the regulator and the firm

  4. I don’t know about a suitability report of more than 10-12 pages confusing the client it depends on what it contains.

    But I absolutely know that the plethora of illustration, key features and KIIDs which are rarely read by clients confuses a huge number of clients.

    Perhaps the FCA could work on reducing that pile of paper (130 pages we saw in one situation recently) down to say 10-12 pages.

    I won’t hold my breath

  5. It’s a shame that, in the event of a complaint, the FOS is unlikely to take any notice of these parameters having been observed, however diligently.

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