FCA Positive Compliance – Investments

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 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 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:

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

Déjà vu – all over again …

Famously attributed to Yogi Berra, long time player and coach for the New York Yankees Baseball team, this phrase came to mind when we saw the agenda for this session. It’s difficult to recall a year without at least one regulatory review or publication on this topic. When you consider that nothing has really fundamentally changed around suitability requirements ever since regulation started in 1989 (albeit that risk profiling was beefed up a few years ago) it is perhaps surprising, but certainly worrying, that the FCA still feels the need to focus attention and guidance on what should, by now, be business as usual for advisers. But this focus continues because, even after all these years, after all the thematic reviews and supervision visits, the FCA is still finding many cases where advice is unsuitable. Now would be a good time to step back from everyday business in order to assess the quality of the advice you give in the light of the comments reported here. And it is pretty clear that firms’ use of platforms is on the FCA’s radar so it would be prudent to ensure you only use a platform when it has been clearly established that the client will benefit from the extra features offered in relation to extra costs incurred. This can only be achieved through a thorough KYC process that identifies clear and client specific needs and objectives.

Action Required By You

  • Check out the links provided here;
  • Make sure your fact finding process identifies clear and client specific objectives and, if a platform might be part of the solution, that you ask questions to establish that the client genuinely needs the features of a platform;
  • Take some time out to consider how your suitability reports stack up against the FCA’s comments;
  • Are your reports …
    – as concise as they can be?
    – clear and understandable?
  • Reconsider your risk profiling process …
  • Does it …
    – comprise a process, a client discussion – or just an ATR questionnaire?
    – properly identify and quantify capacity for loss?
    – establish the client’s level of investment knowledge and experience?

ATEB clients should speak with their account manager as necessary; otherwise contact ATEB here to find out how we can help.

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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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