Advisers and the regulator have reached agreement that many suitability reports are too lengthy.
The longer the reports, the less enthusiastic clients become. In its suitability review earlier this year, the FCA found many suitability reports were too complex. But is it possible to make them shorter?
The FCA has provided a number of examples where suitability reports included superfluous information. However, it has been reluctant to say how long they should be.
The fear, as the regulator expressed at the Money Marketing Interactive conference last month, is that putting a minimum or optimum number of pages would give advisers a licence to produce reports to exactly this standard, regardless of the client’s circumstances.
That means advisers lean towards caution, including too much information rather than too little. According to the FCA’s rules, reports only have to include three things: clients’ demands and needs, why the solution is suitable to meet the objective, and the potential disadvantages. But at what point are each of these points satisfied?
Former FCA technical specialist Rory Percival says some stock sections can be removed and reports would still meet these requirements.
He says: “A lot of advisers have templated objectives, which don’t work for the client, regulator or ombudsman because they are so obviously templated. We see too many that say things like ‘you are looking to have your money managed by a discretionary manager’ in the objectives and then ‘I have recommended this discretionary manager’ in the recommendations. This is never a client’s objective.”
The disadvantages also need to be personalised, he says. “Instead of ‘the new solution may be more expensive, and investment performance may not offset costs’, it is better to say ‘the new solution is 0.5 per cent more expensive, but I believe it is still suitable because….’”
Percival says information on status and scope of service can also be stripped out, is better confined to the terms of engagement letter and does not need to be repeated in the suitability document.
He says: “Often we find that advisers have a lengthy paragraph repeating a lot of the factfind information. You are 52 years old, work as a civil engineer and have a wife and two children. Clients know that. There may be some client information you want to have because it gives more colour to the client objectives but you don’t need to repeat the factfind. There is also a tendency to include everything that the adviser hasn’t recommended. With the exception of stakeholder pensions, that isn’t necessary. Some advisers want to replicate their whole research process in the suitability report and that isn’t necessary.”
Similarly, Percival says, advisers can create guides to investments, defined benefit versus defined contribution, retirement income or inheritance tax planning and hand these to clients, rather than giving repeated disclosures in every suitability document.
In theory, stripping out this extraneous information should reduce the length of the suitability report. The problem, says Lee Robertson, chief executive officer of Investment Quorum, is that advisers are not simply satisfying the regulator. They must also satisfy their professional indemnity insurer, clients, the Financial Ombudsman Service, and – should the worst come to the worst – any lawyer who pores over the recommendations.
He says: “Our PI insurer, for example, is incredibly interested in our suitability reports. They are often reacting to the money they have had to pay out in recent years and, as such, suitability has become a significant focus.”
Professional Partnerships IFA business consultant Gill Cardy says there remains a reluctance on the part of the FCA to accept that the demands of the FOS may be different. She says: “From a pure regulatory point of view, there are things that may not be necessary, but the FOS works to different standards. If a recommendation goes to a complaint, the client says the adviser made a recommendation and it isn’t written down, in the absence of specific evidence, the Ombudsman is likely to believe the client.”
She also believes the reality of modern financial planning makes vanilla suitability documents more difficult. In many cases, she says, they will be looking at many different scenarios and objectives. A client may want to sell their business at 50 and write a book, or spend more time with their family.
“We need to show we have tested a number of scenarios as part of a full lifestyle planning piece. This makes reports a lot longer.”
That said, Robertson believes there are ways to encourage clients to read suitability documents.
Investment Quorum has recently revised its suitability documents in consultation with their client advisory panel: “We strip out all the ‘non-essential’ bits into appendices. This would include all the regulatory blurb, all the risk warnings,” he adds. “We encourage clients to read it saying ‘don’t miss the appendix’, but we provide one short, sharp executive summary at the beginning, so clients can get the headlines. We also include colour, graphics and timelines to break up the written word.”
Cardy believes how the report is framed is important. She says: “If an adviser says ‘here is 97 pages of turgid regulatory information’, they probably won’t read it. It needs to be in plain English, formatted nicely and to be readable. I go through it with the client to encourage them to take control and responsibility for their finances. As such, it is not something I am forcing them to do, but a positive thing to help them understand what they are doing.”
The Mifid II requirement to record all calls may help evidence suitability. Rather than the suitability document as the only proof, there will be other records to support an adviser’s recommendation, allowing for shorter suitability documents in the longer term.