Last month saw the FCA publish the long-awaited results of its suitability review. Suitability is the foundation of good financial advice and customer outcomes, so it is a topic the regulator continually returns to.
That being the case, the retail advice sector should be shouting from the rooftops about the results of the suitability element of the review, with 93.1 per cent of cases deemed suitable and just 4.3 per cent unsuitable (the remainder were “unclear”).
This really is a demonstration of how far the sector has come and must be attributed in part to increasing professionalism following the RDR.
Less positive were the results of the disclosure part of the review, with just 52.9 per cent of firms providing acceptable disclosure and 41.7 per cent being deemed unacceptable.
The most common area of failing was initial disclosure, in particular concerning costs/charges and the firm’s services. That is disappointing, as it really should not be that difficult.
The FCA also found many suitability reports were too long and complex. This is perhaps more understandable: firms are trying to ensure they mitigate their risk in the event of a complaint, but less can be more in that regard.
So, those are the headlines, but what useful lessons can we draw from them?
With regards to overly long and complex suitability reports, the
FCA rules specify the three minimum areas that must be covered as follows:
- The client’s demands and needs (objectives, to put it another way)
- Why the firm has concluded the recommended transaction is suitable for the client, with regard to the information provided by them
- An explanation of any possible disadvantages of the transaction.
While there is clearly a lot that sits behind these key areas (assessing the client’s attitude to risk and capacity for loss being obvious examples), it should be possible to write a report addressing each point clearly and concisely, with any supporting information provided separately if really necessary.
Put yourselves in the shoes of the client. What do you really want to know from your adviser? You are unlikely to be that interested in hearing a lot of detail about exhaustive product research or assessment of the provider’s financial strength. While the adviser may have to do that work to justify their recommendation, and keep their own record, they really do not need to give the client chapter and verse in the suitability report.
And throwing the kitchen sink at a report on the basis it will assist in the event of a complaint is a flawed strategy.
The FCA or the Financial Ombudsman Service will look at whether you gathered enough information to properly understand what the client wants and needs (not all of which must appear in the suitability report), before recommending something suitable and highlighting the potential downsides to the client.
The regulator has promised to publish examples of good practice and firms should use those to really master this area. It will be better for both clients and advisers if suitability reports can be more focused. For one thing, clients are more likely to read them.
Turning to initial disclosure, the issue of disclosing costs should also be easy to address. Again, put yourselves in the shoes of a client. What you really want to know is how much advice is likely to cost.
Disclosing an hourly rate without going on to say how long the tasks are going to take is pretty meaningless (I would not be able to get away with it with my clients), as is giving a huge range of potential costs.
Firms should have a good idea of what their services should cost for a particular client and be able to disclose that clearly.
If you do not know how long the work is going to take and what you are likely to charge for it, how can you possibly maintain a profitable business model?
Where I have more sympathy is with the issue of disclosing the nature of a firm’s services. The term “restricted” sounds inherently negative, so it is not surprising firms try to find ways of describing their services in a more positive light.
The FCA has not provided much more detail on this at present but, again, the examples to follow should be instructive. There cannot be that many esoteric business models so unusual they cannot be captured by a manageable range of good examples. Let’s wait and see.
Ultimately, I would prefer a revision to the regulatory approach which dispenses with the phrase “restricted”. But that is unlikely to happen any time soon.
Overall, though, the report paints a healthy picture and the areas that need addressing are not impossible to deal with.
Let’s do this – at least once we have the examples of good practice.
Alan Hughes is partner at Foot Anstey LLP
Hear FCA head of retail investments Clive Gordon talking about suitability at Money Marketing Interactive, which is being held at the Majestic Hotel in Harrogate on 14 September. To join over 100 advisers and register to secure your free place, click here