The Assessing Suitability Review

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.

Risk profiling
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.

Replacement business
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.

Variations

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.

 

Disclosure problems

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. 

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

Reviews of the suitability of advice have been a regular feature of regulation for many years. Previously, the results were so predictably poor that it seemed a bit like Groundhog Day when one of these papers was published. However, the recent findings are undoubtedly good news for the industry, which finally seems to be getting advice generally right.

Whether that is due to RDR, removal of commission, higher qualifications, new advisers having no ‘bad habits’ or simply a general improvement in standards is hard to tell, but a win is a win is a win so perhaps we should leave it at that!

Or maybe it’s the influence of Compliance Consultants! Who knows!

The highlighted issues – risk profiling, replacement business and disclosure – are all areas where ATEB have identified problems with firms. We have specific solutions available to address risk profiling and disclosure weaknesses and can help firms deal with replacement business compliantly.

Action Required By You

  • The paper is not very long but well worth a read;
  • Review your risk profiling, disclosure and replacement business processes;
  • Talk to ATEB for specific help with any of these areas.

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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