Firms will be aware that the FCA embarked upon a major review of advice suitability in 2016. A large number of firms were asked to provide three cases for review. Where particular problems were found, the FCA reported back to the firms in question and required remedial action to be taken. However, it is of interest to consider the overall findings of that review that have now been published under the unsurprisingly obvious title “The Assessing Suitability Review”. It does what it says on the tin!
The review assessed 1,142 individual pieces of advice given by 656 firms and found the following in terms of suitability:
- in 93.1% of cases, the advice was suitable;
- in 4.3% of cases, the advice was unsuitable;
- in 2.5% of cases, the advice was unclear.
The FCA considers that these are positive results – they are certainly significantly better than previous reviews have found where the proportion of suitable cases languished around the 60s mark.
Most of the issues found were in two key areas.
Where firms were not considering or mitigating the limitations of the risk profiling tool they used or where the recommended solution did not match the risk the customer was willing or able to take.
Where firms were recommending that customers give up valuable guarantees without good reason or where the additional costs appeared to outweigh the benefits of the recommended solution.
Interestingly, the review identified differences between different types of advice and different types of firm.
- Investment advice (94.8%) vs. pension accumulation advice (89.6%)
- Investment advice (94.8%) vs. retirement income advice (90.9%)
- Firms part of a network (97.2%) vs. directly authorised firms (91.4%)
- Independent (90.8%) vs. restricted (97.0%)
- Firms with 1-2 advisers (91.8%) vs. firms with 25 or more advisers (96.2%)
- Firms with 3-24 advisers (89.3%) vs. firms with 25 or more advisers (96.2%)
We believe that it is possible to draw a couple of general conclusions from these figures. First, that larger firms are likely to have more compliance resource and process in place and second, that there is still work to do in relation to advice on pensions.
The paper also included results of the FCA’s review of firms’ disclosure processes. Here the outcome was not so positive. The disclosure results were as follows.
- In 52.9% of cases, disclosure requirements were complied with;
- In 41.7% of cases, disclosure rules were not complied with;
- In 5.4% of cases, disclosure compliance was uncertain.
The assessment of disclosure considered three distinct elements.
- the firm’s initial disclosure
- the product disclosure
- the disclosure in the suitability report
The main area disclosure was unacceptable was with firms’ initial disclosure, which includes firms’ costs and services. The overwhelming issues were: firms disclosing charging structures with wide ranges; and firms using hourly charging rates failing to provide an indication of the number of hours for the provision of each service.