FCA’s suitability letters review is unsuitable

Ken Davy

Ken Davy

There is an air of mystery, anticipation, and trepidation hanging over the Financial Conduct Authority’s (FCA) latest initiative (or is it attack?) on adviser firms.

I refer, of course, to the regulator’s decision to demand sight of the new business registers of some 700 advisory firms, from which it will select at least one file, and in some cases more, for a detailed review.

The FCA’s stated objective is to review the client’s suitability letters, and also the research and investment processes behind the client recommendations.

Article continues after advert

This is obviously going to be an extensive and costly exercise for the FCA, both in terms of time and resources, especially as it follows closely on the heels of the Final Report from the Financial Advice Markets Review (FAMR), which urged advisers to provide clients with much shorter and more concise suitability reports.

The Financial Ombudsman Service (Fos) is reported to have gone even further by saying that client suitability reports should not need to be the size of Tolstoy’s War and Peace.

What does not seem to make sense, however, is that the FCA also recently completed a separate two-year thematic review of advisers’ research and due diligence process, which, like the comprehensive Treating Customers Fairly review of a few years ago, found no systemic failures.

While they did find instances of poor practice and inconsistency, the FCA could have issued enhanced guidance based on their thematic review to help firms check they were following the correct processes, rather than embark on this expensive new survey.

It seems to me that someone needs to ask what is going on at the FCA. Are the Treasury, FCA and Fos deliberately trying to confuse the sector by sending out different messages, or is it that the structure of the FCA is now so big and unwieldy that the left hand does not know what the right hand is doing?

Certainly, it must be an absolute nightmare for any advisory firms which do not have access to comprehensive compliance support. Who do they listen to?

Is it to FAMR and Fos which, rightly in my view, are suggesting that suitability letters should be shorter and more concise, or to their own inherent fears that unless they cover every possible angle, related to every possible client need or circumstance, Fos will come along in a few years and wipe them out?

The great majority of firms and individual advisers are working hard to ensure good outcomes for clients. Rather than undertaking more surveys, the FCA should be reinforcing the importance to firms of having a robust, repeatable and independent investment process that ensures that suitability can always be clearly demonstrated.

Even a suitability letter the length of War and Peace cannot repair an inadequate investment process which delivers bad outcomes for clients.