The FCA is running a series of roadshows around the country. This subject of this session did not appear very inspiring at first sight. Suitability and risk profiling … again. However, while it might seem that there is nothing new to say on this topic, there were some interesting nuances and perspectives. Here is our summary …

Clients don’t read … 

From various surveys, the FCA is aware that clients don’t always read what they should, which is disappointing when firms might have devoted a lot of time and energy to creating fee scales and other disclosure documents and even more effort to writing a beautifully crafted suitability letter! They have done some research around how to improve client engagement with documentation and this is well worth a look – see links at the end of this section. The key points are that documents, including suitability reports should:

• Be as short as possible;
• Use graphics where that would save a thousand words;
• Use plain English;
• Use sub headings to break up text and milestone the document for the reader.

Suitability reports

Identifying clear needs and objectives are the single most important aspect – bar none! These must be on the file and in the suitability report. If they are not, the file is automatically judged to be unclear. Objectives should be specific to the client and not based around the features of the product that is being recommended.

The report only needs to relate to what is being recommended, with the exception of Stakeholder (RU64). Otherwise, discounted things do not need to be in the SR but should be on file somewhere.

Including the disadvantages of the recommendation is a must.

With regard to what is being recommended, a big issue for the FCA is shoe-horning of clients into a regularly used solution, whether that be a model portfolio, DFM or whatever. The use of platforms was singled out for mention in this context. If a platform might be recommended, the fact find should include questions that specifically establish whether the client genuinely needs the features that a platform offers.

Risk profiling

Client knowledge and experience must be explored, not least to ensure that the advice is presented in a manner that the client actually understands. There is a 40 minute ATR video available. See links below.

ATR tools should be part of a risk profiling process and not considered to be the answer in isolation from discussions with the client. The outcome of the ATR tool should be modified by other information.  The problem with most ATR tools is that they assume all clients are willing to accept some loss. And centre bias means that most people are biased towards average, in the middle answers – one way to combat this tendency is to mix up risk descriptions so that the highest risk description is in the middle.

Capacity for loss is not just about income needs, it is also about objectives. Will the clients still be able to buy that cottage by the sea that they are aiming for?

Costs

Costs must be considered and made clear to the client. If a replacement contract is being recommended, a cost comparison must be done and evidenced.

• If the client has incurred extra cost, is it clear why this is appropriate?
• Are there lower cost options?
• If so, why have these been discounted?
• Costs INCLUDE adviser costs!

Research

Research should demonstrate filtering down from ALL relevant products. Research must be on the client file somewhere but DOES NOT NEED TO BE IN THE SUITABILITY REPORT!!! Centralised research merely needs to be referred to in the client file.

When recommending a product that is new to the firm, it is necessary to ensure full understanding by advisers of the risk of that product and any underlying assets. Evidenced T&C should exist for any new product that a firm is recommending.

Ongoing reviews

It is good practice for the suitability report to restate the review process and the implications of not reviewing. Ongoing costs must be quoted in cash terms with a few relevant examples.

If charging for an ongoing service, it must be a tangible service. Firms should not charge for things they have to do anyway, such as maintaining the client file.

Useful links:

• See the FCA slides here;
• Attitude to risk (ATR) video (register to access video)
• Pension reforms and insistent clients
• Insistent clients: good and poor practice
• Suitability reports
• Consumer research
• Disclosure tool (click on ‘Download’ for the Excel template)