Last year the Financial Conduct Authority (FCA) requested files from 700 firms to facilitate its review into financial advice. The files related to investment and pensions sales, which are key themes for the regulator. The importance of advice as a key priority was outlined in the FCA’s Business Plan 2016/2017 last April.
Last year the FCA asked 700 firms to hand over suitability reports for a review of the area. The regulator has begun to send out responses to individual firms, and plans to publish wider findings later this year.
However, even before the FCA’s general response emerges there are some clear steps advisers must take when compiling suitability reports.
Demonstrating is evidencing
When the FCA refers to suitability, it is often accompanied by the word ‘demonstrate’. In a number of its communications, there is a constant use of the words ‘demonstrate’ and ‘suitability’, in relation to one another. So what is the FCA saying? The regulator keeps sending the same message: make sure client files contain sufficient evidence to support a recommendation.
In 2013, JP Morgan International Bank was fined over £3 million for systems and controls failings, and the FCA said there was an ‘inability to demonstrate client suitability from its client files’. A past business review found issues with 1,416 client relationships but, after undertaking a remediation exercise, only one case was found to be unsuitable.
It has been over three-and-a-half years since the bank was fined, but it is a reminder of the possibility of getting into trouble with the regulator if files do not contain the evidence required. This is regardless of whether the advice was ultimately suitable for a client.
Thorough review
All firms should periodically give themselves a health check, and in light of the increased focus from the regulator, there is no better time than now.
How do advisers know if their files have enough information to demonstrate suitability? To start with, be clear on the minimum level of client information a file should contain and use this as criteria to test the file. If any key pieces of information are missing, it is likely to fall short.
After this, test the recommendation itself to see if it stacks up. The rationale for the recommendation, the correct disclosure of information to the client, and how the advice links to the client’s objectives should be clear from the documentation.
Themes of focus
For investment recommendations, risk profiling and risk capacity may sound like an old record, but they are key themes for the regulator. When using tools to assist in making recommendations, it is important files contain detailed evidence of client discussions made after tool use, and to never rely on the tools alone without a client discussion.
For pension recommendations, these themes will apply to risk-based advice, but making sure all pension options have been discussed and evidenced is also high on the list.
When recommending the sale of an existing product, files need to prove how all the relevant factors (cost, loss of benefits, guarantees) have been considered, and that the positives of the new solution outweigh the negatives, making it in the client’s best interest.
When an agreement with the client to offer an ongoing service is in place, the suitability at each review is as important as the initial recommendation, so demonstrating suitability at every service interval is vital.
Matthew Speck is an independent consultant at Speck Consulting.