Practical lessons from the FCA’s suitability review

A lot of the key questions and concerns can be answered by putting yourself in the client’s shoes

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.

FCA review finds nearly half of advisers fail on disclosure

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 

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Robert Milligan 12th June 2017 at 3:55 pm

    I have just read the Terms of Business of an AR = Restricted Intrinsic firm, it says We charge arrangements fees of up to £2000 for a mortgage, plus they get paid by the lender

    on a £75,000 investment they would charge 5% initial and 1% on going WHAT!!!!!!!!!

  2. So…. ?
    Has our industry become more about the ability to construct and write a report (RWL) than working with and advising our clients ?
    RE-: Alan’s point on Suitability being the foundation !

    To that end, is it then, the reasons why letter / suitability report whatever you call it, is for the regulators/ FOS’s benefit because believe you me if I was writing for the clients benefit it wouldn’t have half/90% of the crap in I put in at the moment…

    Then when some half trained monkey (probably no better qualified than burger king staff) from the regulator or FOS picks up said report, he or she can analyise it, and in true Pontius Pilate style pass judgement and seal the fate of the accused… sorry guilty ?

    Then you have the disclosure part……. can the FCA, FSCS, FOS, MAS etc etc tell me, as part of its ongoing proposition what its charges are going to be, what levies will be bestowed on my clients for the next 10 years or the duration of my working life as a regulated adviser ?

    Oh can that be expressed in a one off fee, hourly rate, or percentage (also expressed in pounds and pence)

    You see, my clients need to know this as they do question why my fees to them just keep on increasing, initially and mid term, you must understand it from their position, I mean they hardly know what there fees are going to be from one day to the next let alone next year or the next 5 or 10, there could be a 7% increase (pay rise just because) a levy etc etc at anytime they just need to account for…… you know we can tell them what our fee is on a Monday…. by Thursday it could be different

    Can I also ask, how much is a bag of nuts these days…..

    And yes I did get out of the wrong side of the bed this morning !

  3. This a subject that will run and run with no satisfactory conclusion, EVER.

    How much info is too much? How little info is too little? Rory Percival bangs on every so often about concise SR’s but never publishes any examples. You must use your judgement as to what needs to be put in and what may be safely left out. Thanks for that Rory.

    What will a FOS adjudicator decide about a particular file that may come before him/her? Who can know? Anecdotally, there seems to be a marked lack of consistency from one adjudication to the next, even when the fundamentals of two cases appear to be largely identical.

    Templates are no good, for the simple reason that every client’s circumstances, needs, objectives, ATR, CFL, career and earnings prospects and all the rest of it are a different and unique blend. So every SR has to be customised.

    Like I say, this one will run and run, with no satisfactory conclusion, EVER.

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