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Suitability Reports: Regulator flags template concerns

Rory Percival highlights areas of concern for the regulator around the writing of suitability reports and refutes ‘myth’ around FOS adjudications  

Speaking on suitability reports at the IFP Paraplanning conference, FCA technical specialist Rory Percival both provided guidance on what was necessary and what wasn’t necessary to include in a Suitability Report*, and flagged some areas of concern for the regulator around the writing of reports, notably in the use of templates. Percival also gave his opinion on the ‘myth’ around the standpoints of the FOS and the FCA.

[* See the ABR article: Suitability report content – Percival clarifies what the FCA expects]

While use of templates could help firms deliver consistency in their suitability report writing, there were practical aspects where firms were falling down, Percival said. This could be in the construction of the template but also “in the execution”, he explained.

Percival drew attention to five key areas where the regulator had observed failings and around which it wanted to provide some guidance.

1. Client objectives. “Sometimes we see client objectives in a suitability report which are solution focused. So they will say things like, ‘You were looking for a personalised service through a discretionary investment manager’, or ‘You want access to thousands of funds through a platform’. Those aren’t the clients’ objectives; those are solutions. Clients objectives are things like: ‘You want to retire with £x per annum at age 65’ or ‘You’re due to retire at age 65 but you want to investigate whether you can afford to retire a year or two earlier’.

We would encourage you to make client objectives individual and personal and not to have templates for them.

“Also, we like to see File Notes in a file because it gives much better colour around what clients are really trying to do.”

2. Poor layout. “We often see this and it can be simple things like headings appearing at the bottom of the page or huge great blocks of text that are a turn off to read. Think about how you can make it easier to access and more engaging for the client. Use subheadings, bullet points, graphs and pictures. Make the report more engaging to read. We would certainly recommend that.”

3. Repetition. “An example of repetition would be that in the report you’re recommending an ISA to the husband against which there is a page of risk warnings and an ISA to the wife against which there is the same page of risk warnings. It’s unnecessary.

“Another example I saw recently was where the template had a structure whereby the fund charges were turned into cash terms for the individual client. On the face of it that sounds sensible, in that clients can probably better understand cash than they can percentages, so I didn’t have a problem with the process of the firm. It was the execution that was somewhat problematic. There were two clients, a husband and wife, they had three products, a regular payment ISA, a lump sum ISA and a pension, each. So that was six different contracts each with four funds in them. In the report, the template section that said the fund cost is x percent which is £y cost to you, was repeated 24 times over 2.5 pages. The frustrating thing was the report didn’t tell the client what they really wanted to know, which was what was the total cost overall.

“So they had ticked the compliance box but they hadn’t done the right thing for the client.”

4. Irrelevances. “If you have a client who has £20,000 in their pension pot, why do you explain about the Lifetime Allowance? It doesn’t apply to them yet it’s taking up half a page in the suitability report. Make sure things are relevant to the individual client.”

5. Failing mandatory requirements. “Even though we see some very long suitability reports, we still see them where they fail to put in one of the three elements that are mandatory under COBS:

• Demands and needs

• Why it is suitable for that individual client

• The possible disadvantages.

“So we sometimes see suitability reports that fail to say why the product is suitable. You may be recommending an ISA but why is that suitable for a client? “Sometimes the adviser believes it’s self-evident; well it might be for that client but it might not be. You need to explain why that’s a suitable solution for the client.

“Similarly, we’ve seen cases where the adviser has said a particular fund is appropriate for the client’s attitude to risk and capacity for loss, but not why the fund was picked, i.e. why it is suitable for that client as opposed to any other client on the same risk level.”

What about the Financial Services Ombudsman (FOS)?

Percival said that when travelling the country talking to people in the industry about what should be included in a suitability report and what can be excluded, one reason given by firms for including as much as possible in a report is a need to defend themselves against adjudication by the FOS.

“There are a couple of things I’d say about this,” Percival said.

“Obviously I can’t speak for the FOS but I gave this same presentation at the Association of Professional Compliance Consultants annual conference a short time ago and the next person on stage after me was an ombudsman. The first thing he said was ‘I agree with everything that Rory has just said’.

“The FOS has stated publically that they look at each individual case on its own merits. We often hear that sometimes the FOS will take a different position to the regulator. My challenge to you is, show me where that has happened. We had a call for evidence last year on this and very little was forthcoming.

“For the last 4-5 years, every Ombudsman case has been published in summary on the FOS website. I’ve been reading through these and I’ve yet to find one that is contrary to what we say.

“I think this idea of the view of the FOS being different to that of the FCA is a myth. And I’m not going to change my view on that unless someone comes to me with evidence to the contrary.

“I would ask the question: If you are doing things in the right way for the client, making it very clear to them what it is they are trying to achieve and why it is the solutions you have arrived at meet those objectives, how could that be a problem for the FOS? They are not ticking boxes – they are looking for cases where it’s the wrong thing for the client and they uphold complaints where that is the case. So I don’t think this should be a genuine concern.”

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