‘What Rory Percival is saying is not fact,’ says compliance director
Compliance directors challenge the FCA’s suitability report guidance claiming it does not match the regulator’s actions on the ground
Report from the Personal Finance Society’s Purely Paraplanning conference where the audience heard from the FCA, FOS and compliance directors on constructing suitability reports
FCA guidance on the writing of suitability reports and how the reports can be made shorter, more engaging and accessible for clients has been challenged by SimplyBiz compliance director Gary Kershaw and Stephen Gazard, managing director of Sesame Bankhall Group.
Speaking at the Personal Finance Society’s Purely Paraplanning conference, Kershaw said that in his experience there was a conflict between what the FCA is saying and where it’s people in the field were finding fault.
He highlighted that the guidance given by Rory Percival, technical specialist at the regulator, that there was no need to put into reports details of the products, investments considered but rejected as options as part of the recommendation process.
“That’s all well and good but I’ve probably seen 300-500 cases failed by FCA inspectors because no options were discussed,” Kershaw said.
“What Rory Percival is saying is not fact. It’s fact in respect of what’s discussed in the [COBS] handbook but these are not the standards the regulator’ s inspection teams are taught to check to,” Kershaw argued.
Stephen Gazard, managing director of Sesame Bankhall Group, concurred that while it was difficult to disagree with the fundamentals of what Percival had said, “the reality is different”. He added his own concerns saying that complaints “could span decades” and bearing that in mind, firms needed to ensure they had covered themselves in terms of what was in the reports. “You are absolutely stuck between these two conflicting requirements,” Gazard said.
He added: “We live in a retrospective regulatory environment and a claims environment. The majority of Financial Ombudsman Service (FOS) claims we receive are from claims companies. And while the FCA and the FOS claim to be aligned, they’re not. We also have to accept that clients have selective memories – yesterday’s buccaneer is today’s cautious investor.”
Areas of agreement
Areas of agreement among all parties was that suitability reports needed to be engaging so that they drew the client’s attention to the key points that matter to them and which they need to understand before accepting the recommendations and signing off on the advice.
In this respect Kershaw flagged the need to detail the disadvantages of a recommendation. “That’s generally where we’ve seen the Ombudsman make a ruling, along the lines that the disadvantages were not discussed for a particular product that was recommended,” he said.
Gazard said the best practice when writing reports was to provide an executive summary and appendices (as outlined by Rory Percival in his presentation), with key points crossed referenced from one to the other. “That’s the best you are probably going to achieve.” He agreed with Kershaw that spelling out the disadvantages was a key area and where many FOS rulings were made.
Kershaw also stressed that where complex scenarios and high risk products are involved the “FOS and the regulator like to see pre-sale reports, so they are received within a reasonable time before the end of the cooling off period. They are looking for a period of consideration and all risks disclosed so the client is in an informed position.”
Gazard said that nowadays more and more of Sesame Bankhall’s directly authorised firms were using technology like Skype to record the conversations with clients and were holding those recordings on file. “You kind of take the view that that is as robust as we can be, because then there can be no disagreement what happened during that meeting,” he said. “I think that will become more and more the norm and it’s a big shift from where we are as an industry at the moment.”
Failure in the file not the report
Kershaw pointed out that while an important element, the suitability report is just a part of the overall advice to the client. “I’ve seen cases where the description of the risk in the suitability letter has been quite excellent – it’s been detailed and it stood out on the page – but there was a lack of evidence to support, for example, how the client’s capacity for risk and for loss has been arrived at.
“It’s all about the bigger picture. I think this is far more important than what is in a suitability letter. Where I see things missing is more in the body of the file than in the suitability letter.”
Gazard added: “Every file has to stack up in isolation. Someone must be able to pick up the file and follow the story.”
What Rory Percival said
Rory Percival, FCA technical specialist, addressed the conference via a pre-recorded video in which he said for the majority of reports (i.e. those not dealing with complex areas like pensions transfers and income drawdown) the COBS handbook required that three things be included in the report: “The demands and needs, i.e. the client’s objectives; why you consider the recommendation is suitable for that client; the possible disadvantages, that is the risks.”
He added: “It’s important to remember the objective of the report, which is to put the client in an informed position, so they can understand your recommendation and can judge whether to accept your advice. It is not to cover the firm’s position.
“The outcome we are trying to achieve only works if the client reads the suitability report in the first place. So we are keen to encourage firms to make suitability reports engaging and accessible.” One way of doing that, he suggested, was through an executive summary and appendices.
See also ABR’s article: Suitability report content – Percival clarifies what the FCA expects
For FOS comment go to: Financial Ombudsman’s viewpoint on suitability report writing