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