The FCA has published the results from its review of suitability reports. The headline result of the review of 1042 pieces of advice from 656 firms is that in 93 per cent of cases the sector provided suitable advice, with the balance being ranked either unsuitable or unclear. These are encouraging results for the advisory sector.
At headline level the review of the disclosure provided by advisers was much less satisfactory with only 53 per cent of cases judged as acceptable. However, here it is necessary to delve a little deeper because the FCA divided its analysis of disclosure into four elements, as follows:
- Generic – 60.5 per cent acceptable
- Customer specific – 82.6 per cent acceptable
Product disclosure: 94.7 per cent acceptable
Suitability Report: 92.8 per cent acceptable
The main complaints about disclosure at the initial stages related either to those firms who disclosed an hourly charging structure but no indication of how many hours would be needed, or other firms who provided estimates but a very wide range of possible charges.
Heading towards a holistic approach from the regulator
These results were put into context at the recent Money Marketing Interactive conference where there were strong disagreements between those advisers and commentators who argued that prices should take a higher profile in the “shop window”, and those who believed it was only possible to quote a price after discussion with the customer.
Such a discussion would establish the extent of the advice which was needed, and crucially present that cost alongside an explanation of the value such advice could provide.
That discussion will continue for a long time and in some ways is a symptom of the whole regulatory focus being on “advice events” (i.e. the purchase of a single product) as against the increasing need to put all advice into the context of the customer’s overall circumstances and longer term objectives; a more holistic approach.
The FCA identified issues in two key areas of suitability which will be its focus going forward. The first is in relation to potential limitations in risk profiling tools where the recommendation did not match the risk the customer was willing, or able, to take. The second is in relation to replacement business, where guarantees might have been given up or additional costs appeared to out-way the benefits of the recommended solutions.
There were also interesting divergences in results between different segments of the market:
- Reports relating to investment advice were generally of slightly better quality than those relating to pensions.
- Reports from networks were generally better than those for directly authorised firms.
- Larger firms generally did better than smaller ones.
- Firms providing restricted advice were also slightly better than those who were fully independent.
Getting clearer guidance
So generally the advice sector has come out of this well, particularly since the FCA says it will not be returning to the issue in depth until 2019, although it will put some focus on the issues identified above.
It also tells us that they will use the results to provide some guidance later on what constitutes better, and what constitutes poorer, practice. This will be most welcome.
Perhaps the issue that the review was not designed to analyse relates to the sheer cost of the whole advisory process. The FCA reviewed the entire file for the cases they looked at including “Know your Client” information, assessment of risk, meeting notes, research and due diligence as well as the suitability report itself.
These are time consuming and expensive processes for advisers, the costs of which need to be passed on. However, at the same time we live in a world where increasingly clients are going for the non-advised option, surely in part because of the cost of formal advice.
This is where increasingly technology and robo-advice and guidance must step in, ideally to support the adviser, not to replace them.
Nigel Chambers is managing director at CTC