Assessing suitability has always essentially been based around the same overarching principles …

• The recommended product type should meet the client’s profile and needs?
• The actual product recommended should be the most suitable, taking account of features and costs.

In relation to the second principle, the cliché about cheapest is not necessarily the best remains valid. However, in the world of suitability, it is also true that any ‘excess’ or additional cost must be justified by some additional benefit for the client. Nowhere is that requirement more explicit than in relation to switching where COBS 9A.2.18 requires firms recommending a switch of investments to demonstrate that ‘the benefits of switching are greater than the costs’.

This overall suitability requirement has been enshrined formally in FCA rules since the advent of MiFIDII in January 2018. COBS 9A.2.19 states: 

“Investment firms shall have, and be able to demonstrate, adequate policies and procedures in place to ensure that they understand the nature, features, including costs and risks of investment services and financial instruments selected for their clients and that they assess, while taking into account cost and complexity, whether equivalent investment services or financial instruments can meet their client’s profile.”

The same principle is additionally addressed, but from a ‘value for money’ perspective, in COBS 6.1A.16 which states:

“To meet its responsibilities under the client’s best interests rule and Principle 6 (Customers’ interests):

(1) a firm should consider whether the personal recommendation or any other related service is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account.”

This requirement should be non-controversial. Using an extreme example demonstrates the point – a client wishing to invest, say, £10,000 in an ISA and seeking advice from a firm with a minimum advice charge of say £1,000 is unlikely to gain value from that advice that is commensurate with the cost.

Implications for DB Pension Transfer advice

Firms providing Pension Transfer advice clearly need to take account of all of the considerations around suitability and value described above. However, COBS 6.1A.16 has now been expanded as follows:

“(2) a firm that advises on conversion or transfers of pension benefits should consider whether it would be more appropriate to give a retail client abridged advice (under COBS 19.1A) rather than a full pension transfer or conversion advice (under COBS 19.1) taking into account the total charges the retail client is likely to pay.”

This is guidance rather than a rule but does merit a bit of thought. Does it mean that firms must offer abridged advice? No, abridged advice remains an option that firms can decide to offer or not.

Where a firm does offer abridged advice, we would expect that option to be clearly explained to clients at outset, in order that the client can make an informed decision as to whether abridged advice is an appropriate first step. Of course, firms could also choose to make abridged advice a standard step in the transfer advice process that every client is taken through.

Firms that have chosen not to offer abridged advice should still probably explain the abridged advice concept at outset, that it is available from some firms and could be a less expensive first step. Again, this would place the client in a position to make an informed decision of how to proceed. Firms could have arrangements to be able to refer clients wishing to take abridged advice to a firm that offers the option. In practice, that could be unlikely as the client would then be ‘lost’ to that other firm. Alternatively, the arrangement could be that the client is referred back in the event that follow up full advice is required. There is no rule that requires abridged advice and full advice to be provided by the same firm. However, in that event, the client would have to pay the fee for abridged advice provided by one firm in addition to any full advice fee charged by the other firm. This is allowed for in the rules but has TCF and best interests implications as, where the abridged and full advice are provided by a single firm, the cost of abridged advice must be offset against the full advice fee. Of course, in the two firm scenario, the firm providing full advice could choose to offset the abridged advice fee charged by the other firm anyway.