What is the difference between a disadvantage and a risk warning?
COBS 9.4.7R sets out the minimum content of a suitability report. It is a specific rule requirement of COBS 9.4.7R that a suitability report must “explain any possible disadvantages of the transaction for the client”.
The FCA Factsheet: Suitability Reports also emphasises the need for suitability reports to be “fair, clear and not misleading”, “provide a balanced view” and “highlight how the customer will be advantaged or disadvantaged by the advice”.
It’s important to note that a disadvantage is different to a risk warning. In a nutshell, a disadvantage is a matter of fact, whereas a risk warning is a possible negative outcome.
Example of disadvantages
“As the charges of the new investment are greater than your existing investment, it must provide superior investment performance to achieve an equivalent investment return.” “You will incur a tax charge of £500 on the encashment of your Invesco Perpetual unit trust.”
Example of risk warnings
“Past performance is used as a guide only. It is no guarantee of future returns.” “Your investment can go up and down and you may not get back the full amount invested.”
The regulator also expects you to give equal weighting to the upsides and downsides of your recommendations. Therefore it’s essential that BOTH the disadvantages AND the risk warnings are included within the main body of your suitability report, under sufficiently prominent headings, and not tucked away somewhere in the appendix. Be warned – anything less is likely to render your report non-compliant!
If you use Genovo to write your suitability reports risk warnings SPECIFICALLY TAILORED to the advice you’re providing will be AUTOMATICALLY inserted into a dedicated Risk Warnings section within the main body of your report, and you’ll be prompted to confirm all disadvantages associated with your recommendations during the report building process. As with any step within the Genovo Suitability Report Builder, a number of standard disadvantages (advice reasons) are included for your convenience, but these can be, and should be, fully personalised to reflect the client’s individual circumstances.
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