FCA Positive Compliance Seminars – Suitability Report Guidance

Ed Evans

All of the points highlighted below are included within our suitability report checklist. However, with the FCA’s 2014 programme of Positive Compliance seminars set to start again in May, I thought I’d take this opportunity to review some of the key recommendations impacting the content of a suitability report that came out of their 2013 programme.

Attitude to Risk

Any assessment of a client’s attitude to risk should include

• what risk they are prepared to, need to, and can take to meet their objectives.
• Detailed evidence of how the client’s attitude to risk was assessed should be retained on file.
• A description of the client’s attitude to risk and capacity for loss should be included within the suitability report.
• Descriptions should be clear, use plain English and not contain vague statements or use technical jargon.
• The report should include, or sign post the client to, a description of all attitude to risk categories so they can compare their own profile. 

Client Objectives

• Client objectives should be clearly stated in terms of amounts and terms.
• Each objective should “tell a story” – they should be personalised and include the client’s own words to add further relevance.
• The objectives should be listed in the suitability report in their order of priority to the client.

Replacement Business

• The suitability report should explain why the existing plan no longer meets the client’s objectives and why the proposed alternative solution is more suitable.
• The suitability report must clearly compare the ceding plan and the proposed alternative in terms of costs and charges, performance, benefits and features (including death benefits where relevant), and tax implications.
• Where multiple switches / encashments are recommended, each plan should be compared individually and assessed on its own merits.
• The suitability report must provide suitable justification if additional costs and charges are incurred.
• It was suggested that data be presented in tabular format so it’s easy to compare.
• Consolidation is not sufficient justification on its own – there must be clear benefit.
• Fund performance can only be a partial reason for switching.
• A switch to facilitate ongoing adviser charging is acceptable if the client’s needs and circumstances warrant this, but a detailed comparison of the ceding and proposed alternative is still required.

Other

• Reference to the client’s knowledge and experience of financial products and services should be included in the suitability report.
• Try to avoid the use of technical jargon. If unavoidable at least explain what it means – use of a glossary of terms was suggested.
• Costs and charges in suitability reports should be displayed in £ and pence.
• Where benefits are being taken from a pension, the suitability report should include clear reasons as to why the income and / or tax-free cash is required.
• To reinforce the appropriateness of your recommendation(s), the suitability report should highlight other option(s) you considered (including non-product related), and include a brief explanation as to why these option(s) were discounted. The explanation should be client specific and not rely on stock reasons that often remain unchanged.
• A particular point was made in respect to pension business and the need to discount a stakeholder pension.
• Your service proposition and any commitment to review the recommended product(s) should be clearly outlined in the suitability report.

The FCA’s Positive Compliance seminars have been designed to improve quality and raise standards. Providing your clients with a clear and accurate written record of your recommendations is a key element used to judge your competence. So if you haven’t already, now would be a good time to give your suitability reports a quick health check.

Download our helpful checklist and make sure your suitability reports reflect current best practice and meet the regulator’s key expectations for the content and format of a suitability report.

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