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How to get ahead of the FCA’s suitability scrutiny

One of the key issues emerging from the FCA’s suitability review this year was that fault could be found with almost half of the disclosure documents issued by advice firms.

The FCA has said it will not undertake its follow-up review until 2019; however, it will base this on advice provided in 2018. This means firms have just a matter of months to review their disclosure documents against the FCA’s findings.

It appears the regulator reviewed disclosure documents on a standalone basis. So regardless of other information held on file that could make clear the charges the client has agreed to pay, if the disclosure document itself leaves any room for confusion then this would be picked up.

The acid test

The acid test appears to be whether a client could clearly understand the document without further explanation from the adviser or any other supporting documentation.

But while this would perhaps be understandable if the document was being used for “shopping around” purposes, it is doubtful many firms would regard this information as a primary brochure for prospective clients.

Suitability review three months on: Has anything changed?

Does this show a disparity between the way the FCA anticipates clients use these documents and the way both firms and clients use them in practice?

The FCA has stated on a number of occasions that these documents should be used to help customers shop around. Indeed, the phrase itself suggests they should be used to sell the services of the firm, rather than being regarded as a terms document containing mandatory information the firm is obliged to provide.

But one would be hard pushed to find many firms that send out their disclosure document without either an accompanying initial explanation of their services and charges or further supporting documentation.

The format of disclosure documents is often still based on the old-style Keyfacts template. However, the FCA has paved the way to make them more engaging by removing the templates from its website, as well as much of the prescribed wording.

If we looked at these documents in a different way and used them as a promotional item for a firm’s services, they may naturally become more comprehensive, which could address some of the regulator’s concerns.

Charging options

The FCA also looked at the basis for deciding which charging option would apply in particular scenarios – the point being the client might be unclear. This may happen where firms offer a mixture of fixed fees, hourly rates and/or percentage charges.

When reviewing disclosure documentation, consider whether these could be simplified. For example:

  • If several payment options are available, how often does the firm use each of the options?
  • Are there any payment options the firm no longer uses?
  • Does the firm steer clients to use a particular payment option and, if so, would it make more sense just to offer this one option?

On the issue of simplification, the FCA also found some suitability reports to be too long or complex. Debate about the level of information that should be included within a suitability report has rumbled on for some time. However, in light of these latest comments, now is a good time for firms to take a fresh look at the information they include.

Mifid II will be implemented on 3 January. This directive will affect all investment advice firms, not just Mifid firms. As part of the requirements, it will be necessary for advisers in the vast majority of cases to issue suitability reports before business is placed with product providers.

If a firm’s processes involve issuing suitability letters for investment advice after the business has been written, then it is likely these processes will need to be amended, which may put additional time pressures on creating and issuing suitability reports. If processes could be amended to remove some of the length and complexity from these reports, this could help to alleviate some of these pressures.

Carl Wallis is head of compliance at Bankhall

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  1. With a rule book already (literally) over two meters high when printed, isn’t it time the FCA took their own advice and simplified their own terms of business so we can all clearly see exactly what the hell they want us to do. Yeah. In your dreams!

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