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

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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.

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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

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. I have noticed though that FOS do adjudicate on the basis of an alternative was better suited even if the product met the clients needs, achieved their objectives. In other words we as advisers have to look at alternatives, discuss them with our client and then record them i.e. not only why the product was suitable but why other suitable products were discounted. If you do not do that, FOS will later on hold up a complaint.
    Remember, most advisers are planners and not plan sellers and pulling together all the different strands together is difficult. It does not help when the FCA come up with best practices which grow longer each day, add mandatory information and documentation to give to the client which we have to explain why it is there, get criticised because we have not considered another platform because it is 0.01% cheaper (having gone to the blasted trouble of establishing that fact!).
    It would be a lot easier if we removed a lot of the disclosure material and could just focus on the client!

  2. Doesn’t more prescription equal less flexibility?

    Aren’t the rules clear in what the mandatory requirements should be – (objective, why suitable and disadvantages) and that the document should be clear, fair and not misleading overall. This seems reasonable.

    This then leaves you with scope to create an engaging document. I think more prescription, more rules and less flexibility may provide more boxes to tick for compliance, but it provides less innovative thinking in this space – but then, perhaps that what some IFA’s lack?

  3. This is never going to work if the best interests of the customer are taken into account.
    These reports aren’t designed for the client they are a CYA operation for the firm to show the bureaucrats what they want to see. In doing this the reports are an example of prose that is designed to bore anyone to death. I have seen some of these reports throw in everything but the kitchen sink and run to more than ten pages. If the bureaucrats think that clients actually read these tomes, let alone understand them they are indeed living in cloud cuckoo land. (As we all have long suspected).

    There is actually a simple bottom line. If the recommendation makes money then by and large everyone is happy. The report is only there as a backstop in case anything goes pear shaped and the adviser (or his firm) are able to hold their hands up and say “We told you so at outset when these recommendations were clearly spelt out – so it ain’t our fault”

  4. I have been in industry for 30 years now on both sides of the fence. I really don’t want the FCA to be prescriptive, although some good and bad practice examples are always helpful. My view is that FCA rules are fine, but FOS make judgements on cases – often correctly as advisors have done things wrong in individual cases- but them compliance teams take what happened and try and apply some blanket rules regarding process and disclosure to protect their businesses from FOS decisions and all of a sudden suitability letters have grown to epic length- full of statements to protect the business rather than the consumer. Fact is you can normally see good or bad advice and no matter what complex Process or risk warnings are delivered.

  5. “If the recommendation makes money then by and large everyone is happy.”

    That used to be the case until last year, Harry. The the FCA changed the rules so FOS will look at a complaint even if it turns out that the client HAS made money out of the recommendation. Then, as SJP recently found out, FOS will conclude that the client still suffered “trouble and upset” and is entitled to £200 for it.

    • Trouble and upset for making money? Why are such people even thinking of engaging with Financial Services – the whole point of which is to make money. I am weeping.

  6. Suitability Reports are completely and utterly pointless. If clients wanted to wade through pages and pages of information and it all made perfect sense to them, then they wouldn’t be getting advice in the first place. We should be giving consumers a 1 or 2 page summary that they actually might read and understand. Anything more than that is a waste of time and just increases the costs of advice without improving it.

    • I agree Steve. That is why we record the whole meeting as it shows process and intent of both parties from beginning to end. Suitability reports should be very short and concise and ONLY cover what the FCA already say.
      As Harry has said many times, taking on new clients is the real risk and we need to be extrremely selective in who we take on.
      Lastly, surely if automated advice and all these other forms of advice ARE advice (which i don’t think they are), then the suitabiltiy report requirements should be the same for all delivery methods.

  7. Why on earth would you ask Duglas Baillie’s opinion? He’s been shut down twice for pension mis-selling!

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