FCA ‘Improving the suitability of financial advice’ speech

The FCA has published the transcript of a speech delivered by Debbie Gupta, Director of Life Insurance and Financial Advice Supervision. We recommend all advisory firms should read the text. The speech is aimed at defined benefit transfer firms but the underlying commentary is relevant to all firms.

The speech made clear that suitability continues to be at the forefront of the FCA’s work because the impact of poor quality advice can’t easily be undone.

Some examples of poor practice were also highlighted. For example, some pension transfers were being completed where a consumer had only received a single 30 minute consultation and some consumers were paying for an on-going service but that service was not being delivered.

We have provided a brief summary below but we recommend reading the full text because it includes more detail, background and evidence. 

The FCA has four broad areas of focus:

  • improving standards;
  • targeting firms that cause the most harm;
  • supporting consumers;
  • helping advisers.

The two key areas highlighted in the speech, in addition to lessons learned, were fact finding and evidencing the advice / recommendation to ensure it matches the client’s attitude to risk (ATR).


Fact finding
 

  • Does the fact find sufficiently detail client specific objectives not just the ‘what’ but also the ‘why?’;
  • Does it record ALL relevant information e.g. ALL other pensions?;
  • Does it capture and record soft facts?;
  • Are fact find documents tailored to different clients or advice areas?;
  • Do advisers challenge clients when required? Remember clients may not have full understanding or even fully know what they want;
  • Do you record (tape) client interactions? – while not a requirement the FCA seem to be endorsing this. 

There is a follow up of don’ts which we have transposed below: 

  • Don’t provide templated objectives for the client to tick. Each fact-find should be as individual as the client.
  • Don’t use shortcuts and assumptions. The information you use should be up to date and accurate – for example, calling the scheme trustees to clarify the early retirement factors, or waiting a few more weeks for a state pension forecast.
  • Don’t approach this with bias. Think about the language you use and the way things are presented to the client.
  • Don’t see fact finding as just a regulatory requirement. It is essential to demonstrating suitability and the best way to demonstrate you fully understand your client. It also provides you with cover for your recommendations and advice.
  • Don’t rely on the same fact-find you have used for years. Times change and your fact finding should change with it.
  • Don’t rely on ‘I just know my client’ as a reason not to record key information. One of the most effective safeguards in the event of a file review/complaint is a robust file. This is a file which captures all the client information and can clearly demonstrate why the recommendation meets the client’s needs and objectives.
  • Most importantly, don’t give advice if the client is unable/unwilling to give you all the information you need. If this information is missing, you will struggle to demonstrate and evidence that your advice is suitable. And that is a regulatory requirement!

 

Matching the recommendation to a client’s attitude to risk

  • Do you align asset allocation to ATR?;
  • For DB transfers: do you assess attitude to transfer risk – this is binary i.e. it is either a ‘yes’ or ‘no’, not a scale;
  • Do you consider the limitations of the third party, tools (ATR, cashflow modelling, model portfolio, asset allocation) you use?;
  • Does it evidence ATR – i.e. how do they feel?;
  • Does it evidence capacity for loss – i.e. can they afford potential losses?;
  • Does it assess risk needed – do they need to and should they take the risk?;
  • Do you consider client knowledge and experience?

All of the above, including the fact find points, should be clearly evidenced on file. 

Finally, below are two quotes from the article: 

“Make sure the scenarios that you use are realistic and effective. It is hard to assess if the risk profile is suitable if all the scenarios shown are positive. It is much more effective to stress test people’s reactions to a negative scenario.”

“And finally, it’s not just clients’ knowledge and experience. It’s yours too. Acknowledge and recognise the limitations of your own knowledge. Do you really understand the products and services you may be recommending? We would expect to see evidence of the due diligence carried out on products and services to mitigate this.”

Hopefully the message above ‘rubber stamps’ your processes but, if they don’t, some action is called for.

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

The suitability rules are in place to help you and protect your consumers.

While we hope there is nothing new in the speech, we would recommend that all firms critically self-analyse and challenge whether they are fulfilling the requirements to the level of detail required to clearly evidence suitability.

Action Required By You

  • Read the transcript of the speech;
  • Analyse your company and individual adviser standards;
  • Challenge your processes and advisers to ensure you are fulfilling the requirements;
  • ‘Raise the bar’ – regardless of where the bar is currently set;   
  • … and continue to raise the bar.
  • Contact ATEB if you need further clarification or assistance.

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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