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.
Hence there needs to be some sort of process in place to make sure that only suitable products and services are recommended and that they remain suitable to the client.
The reason is to avoid any future client detriment, hence to root out any potential risks before they become issues. The FCA requires firms to pre-empt any potential customer detriment or other financial problem. In essence, create a governance culture focused on good customer outcomes – section 8 of Mifid II Investor Protection.
The ideas and rules behind suitability and appropriateness are to make sure that all recommendations to clients are understood in terms of how appropriate they are to solving the client’s need.
To achieve this, firms need to make sure that at the heart of their products and services there is consideration for:
- good customer outcomes
- a reduction in client conduct risks
- products are sold (distributed) to the right client (segments) and in the right way.
Hence all financial firms should make sure there are no gaps within their organisation in terms of service quality, oversight and controls and product governance - in other words, ensuring there are good products and carrying out an ongoing review of client conduct risks. Product governance is about avoiding customer detriment, thereby helping to put consumer confidence back into the industry.
4) Service and product due diligence
Any recommendation, such as to provide for retirement or for long-term care, conducting due diligence on the product or service and ensuring its suitability for the client’s needs is at the very core of financial planning.
Without proper due diligence, the client could actually be better off from never having taken financial advice in the first place, e.g. the mortgage endowment policies of the 1980s and 1990s and the pension miss-selling issues.
To help with suitability, product governance aims to make sure that, at the point of sale and ongoing, the products and services remain appropriate, solve a need and perform as originally envisaged.
At the client level, suitability helps the adviser and client understand what the product is, the features and benefits, why it is needed and the risks involved.
5) Assessing suitability FCA COBS 9.2.(2) Treating Customers Fairly
