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FCA on suitability reports, risk profiling and recording client meetings

FCA’s Rory Percival tells advisers “watch this space” re further guidance on suitability reports and comments also on risk profiling and recording client meetings

A probing question from an advisory firm’s compliance officer at the Distribution Technology annual conference raised a response from the regulator that suggested there will be more definitive guidance forthcoming on the structure of suitability reports and hinted at potential collaboration between the FCA and the Financial Services Ombudsman (FOS) on the matter.

In the session discussing suitability reports, the questioner rued the “insidious” process of suitability letter/report review and said while in an ideal world the reports should be shorter, as the FCA has intimated, “we always have the spectre of FOS interpreting the rules of the FCA. The problem is until we get the FOS and the FCA in the same room, saying the same thing about what they expect suitability reports to contain and giving examples, there’s always going to be a difficulty in reducing the size of the reports,” he said.

This prompted the response from Rory Percival, technical specialist, FCA, to “watch this space”.

Percival said that what the regulator was looking for was suitability reports that were “short and more concise” compared to many it had seen but “first and foremost, the client should be able to read and understand the report. As a sector that’s not generally where we are at the moment. Reports are more often concerned with covering the firm’s position.”

Referring to arguments from advisers’ that more information has to be put into a report to cover themselves with the Ombudsman, Percival responded “I don’t buy that. If suitability reports are personalised and truly demonstrating why the recommendations are suitable for that individual client and communicated to that client in an effective way, I don’t see why that report will stand less chance with the Ombudsman. Second, I can’t speak for the Ombudsman but why don’t you ask them? They would say similar things to us.”

Percival said within suitability reports “there is scope to take out elements that don’t need to be there and that aren’t contributing to the client’s experience of your services.” He cited receiving a letter recently from an adviser “who said ‘this is what my compliance department tell me is needed in suitability reports’. It was about a page and a half of bullet points. I went back and said about three quarters of them weren’t necessary.”

He added: “Generally, there is a lot of unnecessary detail in reports. They are sometimes poorly constructed – I’ve seen a recommendation to invest in a particular fund given to a husband with a number of risk warnings, and a few pages later a similar recommendation was made to the wife followed by the same page. I think simple things like that are completely unnecessary.

“I think there is a lot of work to be done to improve suitability reports for clients, in a way that doesn’t affect the risk a firm is taking on by dealing with that client. I am pleased to see that people are looking at that,” he said.

Recording meetings

In response to an adviser’s statement that he now recorded all client meetings in order to protect himself from client complaints years down the line, Percival said that such recordings “shouldn’t be necessary”.

He explained: “The file itself and the suitability report should make it quite clear, and the rules require it to be clear, that you have demonstrated suitability.

“We occasionally hear anecdotally that writing reports isn’t a strength of particular advisers, but if you are acting as a professional firm and you’ve got advisers who aren’t good in that particular area, you need to work around that somehow and not let that deficiency carry forward.”

Risk profiling

On the issue of risk profiling, Percival said the regulator had “three areas of potential concern in some quarters”.

1. Risk descriptions

“If you are using a risk profiling tool how you categorise the level of risk the client is willing to take and how you discuss that level with the client” was one concern, he said. “We still see examples which are quite poor for reasons we set out in 2011, for example using vague language or not quantifying the level of risk the client is willing to take. Clients need to be able to properly understand what kind of risk they are signing up to when they agree to the level of risk they are happy to accept.”

2. Capacity for loss

Percival said that prior to FCA guidance on this issue few firms were looking at capacity for loss, “or at least few firms were doing it explicitly”. However, he said, there had been “huge steps forward in that area, which is very pleasing to see, although we still see pockets where firms aren’t addressing capacity for loss in sufficient way.”

3. The client’s knowledge and experience of investment

Percival said: “This is the third element of the risk discussion and we’ve found sometimes it hasn’t been looked at at all; sometimes it hasn’t been looked at sufficiently; or where a client has been asked, their answer hasn’t been taken into account in the recommendations made, and most particularly in the way those recommendations have been communicated to that client. For example, where the client is not able to understand the recommendations because the suitability letter used a lot of jargon and complex terminology which that particular client would not be able to understand.”

Adding to the discussion, Distribution Technology’s chief executive Ben Goss flagged the greater and more in-depth use of the Dynamic Planner’s capabilities as a measure of the positive changes in the market over the past five years. He said: “Five years ago most advisers were using the psychometric questionnaire as the means to address suitability. Today we can see how many people are looking at capacity for loss, how many people are undertaking Value at Risk discussions and how many cases are completed by advisers analysing a client’s portfolio.

As a measure of how far the market has come in respect of risk profiling, Goss said: “Every quarter more and more advisers are completing what I suspect the FCA would see as a more robust and comprehensive process. It’s important for advice firms to embrace the breadth of the processes available to them.”

 

 

 

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