What you need to know about TCF

  • To asses the different regulatory objectives for TCF.
  • To understand how to address suitability.
  • To ascertain how to demonstrate TCF in investment advice.
What you need to know about TCF

Consumers should have access to products and services that are well governed and deliver value for money in competitive markets that work in their interests.

This is the FCA's objective. But what the industry regards as innovation has often proven to be highly complex products being sold.

In fact, many of the past FCA reviews of past (miss) sales have had a complex proposition at the root of the problem, leading to poor marketing and product literature or unsuitable advice being given.

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The root of that has been due to a lack of product understanding from both the adviser and client.  Suitability and product governance arrangements should be in place to monitor and manage risks to the consumers and the associated processes should prove to work as intended.

Meeting customers’ fair and reasonable expectations should be the responsibility of firms, not the regulator.    

TCF is about getting the right outcomes for customers, as opposed to complying with a set of compliance rules. 

1) Matching risk and rewards

Financial planning solutions aim to meet a client’s current and anticipated needs, allowing funds to be used to say protect the lifestyle of a client and their family and be achievable within an affordable manner.

All options,though,come with risk, especially those that can decrease in value, such as investments, so it is important that any risk return profile of the client matches that of the recommendations (the product).

In that respect, it is also important to make sure the client’s “comfort level of risk” is taken into account and not just relying on a tick-box algorithm.  

2) Suitability (COBS – principle 9 - principles for Businesses)

Rules on suitability apply when a firm makes personal recommendations relating to designated investments, managed investments and advice given and taken up (paid for).

The rules aim to make sure that recommendations or decisions to trade are suitable for the client. In order to assess suitability, there are three different elements concerning the client that need to be considered:

  • Knowledge/experience (to understand the risks)
  • Financial situation (to bear the risks and losses)
  • Objectives (purpose of investment).

Suitability of the advice helps with prioritising what is important now versus a long-term holistic financial plan.

Suitability, while being a regulatory requirement, helps with neutralising any biases from an adviser and a client’s own financial knowledge and experiences.

Therefore, suitability can be seen as a format or guideline to follow; to arrive at the most suitable answer/recommendation.   

3) Developing suitability under MifidII

Mifid II is increasing the scope of investment products for which appropriateness and assessments must be undertaken. This means conducting additional due diligence to ensure the more complex products recommended are suitable for clients.  

One important area in being able to confirm suitability is to ascertain the level of risk a customer wants but at the level of risk they can afford to take.

The main problem is that investors often do not understand what risk really entails. Further complicating the matter is that excessively low-risk investments can be just as damaging to an investor's portfolio as those that carry unsuitable levels of risk.