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FCA’s Percival warns against a ‘tick-box’ suitability mindset

FCA’s technical specialist raises concerns that ‘over-cautious’ checklist approach to suitability reports could lead to regulator questioning suitability of the advice given.

Compliance officers’ insistence that content is included in suitability reports as part of a ”tick box approach” aimed at protecting a firm’s back, is likely to raise doubts about the suitability of advice with the Regulator and the Ombudsman in the event of a complaint, FCA technical specialist Rory Percival has warned.

Talking to some 80 paraplanners at the Paraplanners Powwow, Percival said where firms include sections that are clearly not relevant to the client, then there will be grounds for the Regulator and Ombudsman to question whether the client could have understood the advice given and whether the advice was in fact suitable to the individual client.

“If you’ve got suitability reports that are demonstrably personalised to the client because they are clearly tied up with the personal information you’ve got in the fact find, whether it’s the Regulator, the Ombudsman or the courts looking at that file, [in terms of the suitability report] you will be fine.

“It’s where you have standard text included and the client can say ‘all of that doesn’t apply to me’, then we, the Ombudsman and the courts can start questioning the other content of the suitability report,” Percival said.

Questioned over balancing a shorter report with demands from compliance that standard sections and paragraphs are included, Percival said compliance officers were often “over cautious” and “not focused on what the Regulator wants”.

He added: “I probably shouldn’t say this as an ex-compliance officer but some compliance people are not very good… The quality of some compliance officers needs to improve.”

Expressing what looked like the Regulator’s frustration over this issue, Percival said the compliance “belt and braces approach” that includes everything in an unwieldy document in a “formulaic approach” was “befuddling”.

“Quite clearly the Regulator says not to do that and quite clearly the Ombudsman says not to do that. Why the people who say you should do that think they know better than the Ombudsman and the Regulator is beyond me. They really need to change some of these practices.”

While acknowledging that a firm would want to protect itself was a “natural position”, Percival said that the focus should be on “what’s relevant to the client”.

What is key is the objectives of the client and how the advice and recommendations fit with those objectives, he said. For the suitability report to do its job the client has to be able to understand the recommendations in the context of their own circumstances.

“Make sure the objectives are individual to that particular client, where possible using the clients own words.”

He warned against “outcome focused objectives”, quoting examples such as ‘you wanted the ability to have funds on a platform so you could switch funds on a regular basis’ or ‘you want to be on a platform to have access to a range of quality funds’.

Using his own experience as an example, Percival said that he carries “a little black notebook” with him in which he records all the things he wants to do when he retires. “My financial planner’s suitability report said ‘you need this amount of income in order for you to do all the things you want to do in your little black book’. That’s exactly the sort of thing we want to see.”

Percival pointed out that suitability of the advice was assessed not just by what is in the report but by what is in the file. “We are conducting file reviews at the moment and the clue is in the name, it’s a file review not a suitability report review,” he said.

Percival said some content could be “more effectively” included in letters and documents outside of the report itself. “You don’t need to recap what the scope of the service is that you are providing because you can cover that off elsewhere, for example in a letter of engagement to the client about what work you are going to do for them.”

Citing an example of good practice that both he and his colleague Chris Hewitt had flagged when file checking one firm, Percival said that the suitability report had set out on the first page five headings, in order of:

1. What are your objectives?

2. Why is this recommendation suitable?

3. What are the disadvantages?

These are “the three mandatory elements” of a suitability report, Percival pointed out. The firms also included:

4. What are our charges?

5. What are the next steps?

“I thought that was great. That firm’s template probably just has those headings and no template text afterwards, so that everything that is written on that first page is individual to that client.

“Clients might not read the whole suitability report but they will read the first page.”

A suitability report “effectively is telling the story of the advice”, he added. “Start with the fact find and what the client is trying to achieve. If the report replays that story to the client and how the recommendation suits that individual client then they are going to read it.”

“Overall with a suitability report what we want is to get the client to read them. It’s a document for the client, so they can make an informed decision about what you are recommending to them. It’s not covering the firm’s back; it’s for the client.

“The aim is to have documents that are manageable, attractive, engaging and informative and personal to that client. That is what you are trying to achieve.”

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