Walking a fine line: Advisers wait for FCA answers on suitability


Advisers want more clarity from the FCA on what it expects from suitability reports ahead of the results from the regulator’s wide-ranging review of advice and product recommendations.

They are also calling for greater collaboration between the FCA and the Financial Ombudsman Service to make sure they interpret suitability reports in a similar way.

Sorting the data

In April the FCA sent a letter to 690 advice firms asking them to submit records of all personal  recommendations in 2015 and answer a survey breaking down the data into non-pension investments, pensions and retirement income sectors.

The original deadline was 3 May and by mid-May, the FCA had the data back from 95 per cent of firms. It then requested nine client files; four in the non-pensions space, three in accumulation and two in decumulation.

The review is looking at the suitability of advised product recommendations, and not at the suitability of direct-to-consumer or automated models.

The FCA is unable to provide a full breakdown of the 1,200 files it has now collected by case type. The regulator says only two firms missed their submission deadlines, with eight granted extensions due to factors such as sickness and annual leave. The FCA says the vast majority responded in a “very positive manner”.

“If you try and engage with the FCA their response is: no comment. They say: ‘It’s up to you to interpret our rules, not for us to tell you’”

Money Marketing understands firms’ submissions are not primarily being used to inform supervisory action against particular firms. Instead, the regulator wants to take a wider look at the advice market as a whole.

The exact format of the FCA’s response to its findings has yet to be decided. It is still in the process of quality assurance and review before going back to any firms that may require follow up investigations.

The FCA expects to publish its findings by the end of the year.

Now that the data collection exercise has completed, advisers are looking to the regulator to set out more specific suitability guidance.

Douglas Baillie Tax Planning and Wealth director Douglas Baillie was one of the firms that submitted data as part of the review.

He says: “I would welcome anything from the FCA that’s prescriptive and for the regulator to say what is acceptable. I would look for them to say what they expect from us in some detail, for example, ‘here are the form of words or shape of what a suitability of advice letter should look like’. At the moment we don’t really know what the FCA would find acceptable.

“If you try and engage with the FCA their response is:  no comment. They say: ‘It’s up to you to interpret our rules, not for us to tell you.’”

What does ‘suitable’ look like?

The regulator has some initial findings from the review, but has not disclosed them formally.

Money Marketing understands FCA technical specialist Rory Percival used a speech at a recent paraplanning event to note the good and bad practice the regulator had discovered on suitability since starting the review, but stopped short of revealing more.


The FCA’s conduct of business rules state there are three things that need to go into an adviser’s suitability report: The demands and needs of the client (their objectives), why the recommendation is suitable in light of those objectives, and the possible disadvantages of the recommendation. But how these factors are documented is left up to advice firms.

One compliance expert, who wished to remain anonymous, reports a few networks were “running around like madmen trying to retrospectively tidy things up” but were unsure how hard the FCA would come down on transgressions.

‘In the dark’

But even if advisers are confident they have met the FCA’s suitability requirements, they are still uncertain this will protect them against ombudsman complaints.

Santorini Financial Planning managing director Matthew Walne says while the FCA’s recent Live and Local  events with advisers had helped reaffirm the regulator’s position, there was still tension concerning the FOS’ approach to suitability.

He says: “The FCA is pretty clear it doesn’t want loads of stuff in there that doesn’t need to be, and it should be concise and clear for the client rather than full of data. The problem is the FOS wants lots of detail. Even though the FOS says it works with the FCA, there is a discrepancy.

“When it comes to the crunch, the FOS will look through everything and if it’s not written down somewhere they are going to go for it. The FCA are saying ‘we want it nice and short’ but is that covering us?

“The FOS looks at things on a case-by-case basis with no blanket approach where they are prepared to endorse something”

“Is the FCA expecting 20,000-odd advisers to interpret the rules in the correct way? Until the FCA categorically comes out and says this is what we want and what the FOS expects, then we are in the dark.”

Baillie agrees the FOS also needs to be clearer on how its judgements relate to FCA rules. He says: “What’s important here is: do the FOS agree with the FCA? I don’t see that at the moment. The FOS won’t take a prescriptive view. They look at things on a case-by-case basis with no blanket approach where they are prepared to endorse something. The FOS should be telling us what it expects.”

An FOS spokeswoman says: “We agree with the FCA on the fundamentals the suitability report should contain but, of course, this is only part of the evidence we look at when considering a complaint.”

Independent regulatory consultant Richard Hobbs says it can be a challenge for advisers to comply with suitability requirements, and for regulators to enforce these.

He says: “The industry is finding it difficult to articulate what suitability is. It’s a subtle concept to try and regulate. It goes to the ethics of the adviser, the good faith and give and take between them and the client. It’s about trust, and you can’t regulate these things very easily.”

Expert View: Esrar Moitra

What we really need is for the FCA to come back and actually tell us is what its findings are from its review, with feedback, and update the work it did on suitability around 2011.

With suitability letters, it would be helpful if the FCA gave more prescription for different types of transactions. If you look at the rules they are about needs, objectives, making sure things are risk-appropriate and clients being able to bear the loss. But the interpretation for those can be very different.

It depends on the nature of the transaction. With a pension transfer you need much more information, and the same goes for inheritance tax planning, but the FCA does not give that level of prescription.

There are a couple of reasons for that. One is it stifles the legitimate latitude of advisers to make professional judgements about suitability, and, second, being too prescriptive would create a moral hazard, a “safe harbour” situation the FCA is not going to want.

It is right advisers have flexibility and freedom, but it also means they can get blindsided by the Financial Ombudsman Service. The issue with the FOS is even if a firm has
followed the rules, that does not necessarily lead to suitable advice. You can have a situation where the rules have not been followed and you still get suitable advice.

The FOS is making a judgement on the outcome. If there is a breach in rules that leads to the wrong advice, they will uphold that complaint, but if there has been a breach which leads to suitable advice, strange as it sounds, the adviser is not going to be held to account for it.

The guidance we have needs to be refreshed. The market has changed a lot, particularly with more automated advice models coming in. I am hopeful they will see a real improvement in the standards of advice.

The vast majority of advisers I work with are having the quality of conversations you would expect; the client understands what the risks are. A lot of issues just seem to be more around how it is recorded, where you have multiple conversations and it is not a linear process. But if in the course of the review the FCA finds the quality and standards of advice are poor I would fully expect them to follow up on it. There is no doubt about that.

Esrar Moitra is a former senior associate at the FSA and consultant at Optima Regulatory Strategies