Read this business blog provided by Aviva’s Adviser Development Manager Gerard Dodgson TEP, to understand the issues facing advisers and client suitability reports.
The grey areas of financial compliance can often create fertile ground for costly and time-consuming challenges to an adviser’s competence and integrity. Client suitability reports – although initially drafted with the best intentions – can sometimes become the source of conflict at some point in the future. So what can we expect from the Financial Conduct Authority (FCA)’s plan to publish guidelines on suitability reports and its intention to make them more consumer-friendly?
When grey turns to red
It’s often the case that advisers who face the combined might of the FCA and the Financial Ombudsman Service over client suitability issues can end up feel like they are in an unfair fight. Up against the ropes, the knockout blow can come from one of many directions: the capacity for loss; risk descriptions; or the client’s knowledge of investment matters. In most cases, the suitability report is the ‘smoking gun’, a point of focus where grey areas become red lights.
Regulator reviews highlight areas of concern
‘Know your client’ and ‘suitability’ are central tenets in providing financial advice. In the recent past, thematic reviews ‘Assessing suitability’ (FG 11/05) and ‘Wealth management firms and private banks - Suitability of investment portfolios’ (TR 15/12) outlined many areas of potential concern. For example, the first review rated 50% of the investment files it examined as unsuitable on the grounds that the investment selection failed to meet the risk a client was willing and able to take. More recently, TR15/12 assessed 150 files from 15 firms and considered a range of criteria to assess clients’ investment portfolios. The review’s results showed that 23% indicated a high risk of unsuitability; 37% were unclear; and 41% show a low risk of unsuitability.
Latest review spotlights disclosure issues
In May 2017 the FCA issued ‘The Assessing Suitability Review – Results’ with a broader scope and wider sample: 1,142 pieces of advice given by 653 firms. On disclosure, the review assessed three elements: a firm’s initial disclosure; product disclosure; and disclosure in the suitability report. A key area of unacceptable disclosure concerned adviser firms’ costs and services. On the positive side, the review found that in 93.1% of cases, suitable advice was provided. However, the review’s disclosure results revealed that – in line with the two previous reviews – that in 41.7% of cases the level of disclosure was unacceptable and some suitability reports were too long and/or complex for clients.
In addition, the review identified issues in two key areas: risk profiling and replacement business. Although the limitations of risk profiling tools had been examined before, replacement business in this context is a relatively new concern. Here, the regulator put the focus on clients giving up valuable guarantees without good reason or where the extra costs overweighed the benefits.
As we edge closer to the FCA’s publication date for suitability report guidelines, we already have a good picture about what the recommendations are likely to contain in terms of content and presentation. For content, it’s a case of scaling-back the sheer volume and for presentation, an approach which prioritises readability.
Content repetition and editing
First, let’s cover content. COBS Chapter 9 confirms that three key issues must be covered: the client’s objectives; what is suitable for the client; and the potential risks. So we should consider editing-out some of the unnecessary information that often ends up in a report. For example, there is no real need to repeat your client agreement within a suitability report, or include information about alternative products that you have considered unsuitable for the client.
In addition, you don’t need to repeat information about the investment strategy’s processes, or duplicate tax information that is already in product literature. Summary tables can be a good idea for product and adviser charges and you can cross-reference to KIIDs and KFDs. This isn’t an exhaustive list, but it should be enough to rein-in some excesses. Simply stick to the three COBS requirements.
For presentation, best practice means keeping the report as short as you can, use bulleted lists rather than long sentences and putting technical information towards the back of the report, in an appendix. The content: objectives; needs; priorities; and relevant existing investments should ideally build a picture of a client that you can readily imagine from page one, not on page twenty. Presentation matters: the advantages of a front page, bullet-pointed summary cannot be underestimated: the FCA frequently uses this approach itself. Less is more.
You can also use bold text to highlight important points and use the client’s own words to make your recommendations more relevant. Good files notes or even audio recordings can help you with this. It’s a good idea to send the report to your client before your second meeting so that you can clarify points on your second meeting.
Can clarity triumph? Let’s hope so. To sum up, each client is unique. From birthdate to family ties, from occupation and earnings to property wealth, there’s a story to tell. Let’s hope future suitability reports can deliver the full picture.
Gerard Dodgson TEP, ACII, APFS
Adviser Development Manager
Registered Trust & Estate Practitioner
Chartered Insurance Practitioner