When speaking to most discretionary investment managers, it is clear that they have a simple mandate; to ensure their clients receive the very best service, while continuing to operate a compliant and profitable business.
With this in mind, it comes as no surprise that, in the current investment climate, many wealth managers are asking themselves; how will I continue to meet the regulator’s ongoing requirements?
Suitability of advice
When the regulator wrote out to all firms at the start of the year in its 'Dear CEO' letter, suitability of advice was number one on its agenda and, while focus has inevitably shifted in the past few months, its core objectives have not.
The first FCA Assessing Suitability Review was in April 2016 - the purpose of the review was to assess a sample of advice files that would allow them to draw conclusions on the suitability of advice and quality of disclosure in the sector as a whole.
Even though the outcome of the review in terms of suitability was positive, in the FCA Business plan of 2019/20 it announced a review of the market for pensions and investment advice for a second time – the Assessing Suitability Review 2.
This second review is different than the first and will focus on the advice that consumers receive around retirement income.
The FCA commented that, with a greater number of options now available in retirement planning, it is vital that consumers get good advice at the point they access their pension savings and, if necessary, going forward.
Although the FCA has temporarily shifted Assessing Suitability Review 2 to the backburner, we anticipate that it will be only more important to the regulator in the post Covid-19 world.
As you know, the review will focus on initial and ongoing advice to consumers about taking an income in retirement, and we anticipate that all future reviews will cover sustainability in all market conditions.
The above reviews and other thematic supervisory activity in this area highlight the importance of an authorised firm having a robust, compliant, fully documented advice process in place, and fully trained and competent staff to deliver the elements of that process.
These key controls are contributors to ensuring that suitable advice is provided to clients with the necessary consumer outcomes achieved.
What the regulator expects
We know that the regulator would expect to see the following:
- Costs which are clearly defined for the service provided and structured in relation to the service delivered.
- Services and their costs shown in a way that is clear, fair and not misleading.
- That clients have a clear understanding of the level of charges and the nature of services on offer.
- The FCA does not prescribe the basis on which a service is charged but expects a firm to set and operate charging structures responsibly.
- The firm obtaining all relevant information in order to understand each client individually so that specific transactions meet investment objectives.
- The FCA does not prescribe how firms assess customer risk, however firms need to ensure they have a clear and robust process that is fit for purpose.
Analysing your advice process is important for several reasons. It sets out a high-level framework on how you will deal with your clients and places emphasis on key business and compliance areas such as:
- Know your client (factfinding).
- Ensuring your charging structure is clear, fair and not misleading for both initial advice and ongoing services.
- Ensuring clients understand your advice processes and recommendations.
- Managing the risk the client is willing and able to take, and accurately assessing their capacity for loss.
- Managing the risk of your recommended solutions effectively.
PROD is one of the first areas to consider in regard to suitability. PROD is not about determining the suitability of an individual investment/product that will be targeted to (potential) clients of the firm, nor is it about identifying a specific investment/product for a specific client - that process remains within FCA’s ‘suitability’ rules.
Instead, PROD is about firms understanding the customers they deal with, or target, and having knowledge of the different types of investments/products that may be appropriate for them.
Questions appear on the last page of this article.