Evolution of the FCA’s view of suitability

It seems hardly any time goes by without the results of some regulatory review of advice suitability being published or another forthcoming suitability review being announced. No great surprise really as it would be pretty difficult for the FCA to identify the state of the market without occasionally looking at some actual real life advice as provided to consumers.

In the early days of regulation, suitability assessments tended to be binary, that is to say advice was assessed as being suitable … or unsuitable. Nothing in between!

In recent years, the FCA introduced a third option, ‘Unclear’. This was intended to reflect that in all too many cases, client files can be lacking in some way, usually some key information missing in action or a lack of clarity around some aspect of the client situation. The idea was that, without the missing information, it was simply not possible to assess the advice one way or the other. In theory, if the missing information was subsequently able to be provided, it might be possible to assess the advice as suitable – or confirm it as unsuitable.

Now, it appears that the FCA has developed its thinking around assessing advice a little further. In recent feedback to firms around defined benefit pension transfer advice, the FCA graded advice in one of the following categories:

  • Suitable;
  • Non-compliant: unsuitable advice;
  • Non-compliant: material information gap.

The first two need no explanation, it is the last grading that is new, or at least looks new.


Meet the MIG

The material information gap, which the FCA abbreviates to ‘MIG’, is defined as follows:

“A material information gap in the file (MIG) means that the firm failed to collect the necessary information to assess suitability.”

At first sight, a MIG grade would appear to be little different to the previous ‘Unclear’ grade. Indeed, it is very similar. The principal difference is that the FCA links the MIG explicitly and specifically to non-compliance with COBS 9.2.6R.

Insufficient information
COBS 9.2.6 R
If a firm does not obtain the necessary information to assess suitability, it must not make a personal recommendation to the client or take a decision to trade for him.

It is not uncommon to see suitability reports with some key information either missing or decidedly unclear. In those cases, as the report is merely the documenting of a personal recommendation, the ‘Insufficient information’ rule strictly means that there should not have been a suitability report at all.

Could it be that some advisers are not aware of this new rule? Well, it could certainly be the case that some advisers are not aware of the rule. But absolutely not because it is a new rule. It has been in place since November 2007!

The other difference between the MIG and Unclear grades is subtle yet significant. As indicated above, Unclear could be considered as neither suitable nor unsuitable. The FCA considers a MIG to be in the same box as unsuitable by default. Both relate to a non-compliance with ‘COBS requirements’.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

It remains to be seen whether this new categorisation of suitability assessments will be applied more widely going forward or is confined to pension transfer advice, a major and continuing focus of concern for the regulator.

Nonetheless, it’s a useful reminder, if one were needed, that advice can ONLY be suitable if it is based on a comprehensive documented understanding of the client’s situation and objectives. The key word here is ‘understanding’. Having a ‘fact find’ full of facts and figures about the client is a good starting point but is never sufficient in isolation from the background and context that related soft information provides.

 

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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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