04May

The Financial Conduct Authority (FCA) will shortly conduct what is possibly the largest review of financial advisory firms’ business it has carried out so far.

700 firms, including some of the very smallest firms, have been informed that they have been selected to participate in a review of suitability of advice. The regulator will review more than 1,000 client files in total.

If the FCA finds issues with the few files it reviews from a particular firm, it may conceivably decide to review further files, or may instruct the firm to conduct its own historic business review and to compensate any clients found to have suffered detriment. In serious cases, enforcement action may be taken against the firm and/or its senior management.

As with previous reviews, the FCA is expected to issue a summary of its findings once the review has concluded, which will contain general issues for firms to consider, and examples of good and poor practice identified at participating firms.

The participating firms have already been required to provide the FCA with an ‘advice register’, which should give details of all personal recommendations made in 2015. The register should highlight any insistent client cases, any recommendations to surrender an investment and any recommendations to use a discretionary management service.

The regulator will now contact these firms again before the end of June, informing them of which files it wishes to review. It is thought that the review will not involve FCA staff visiting firms’ premises, and that it will instead review the files remotely.

The review may shed some more light on the FCA’s stance on suitability reports. It has previously said that it believes these are too long in many cases, but some firms remain wary of writing shorter reports, and believe that a longer report gives them a better chance of demonstrating suitability of advice should the Financial Ombudsman Service be called upon to consider a complaint regarding the case.

It will be too late for any cases selected for review by the FCA on this occasion, but going forward firms must have rigorous systems and controls to ensure suitability of advice.

Advisers must be assessed as competent and must understand the products they are recommending and the regulatory considerations they must observe – here firms can make their advisers sit knowledge tests and the like.

Firms must also have a rigorous file review system, where a suitably competent individual impartially considers the quality of the advice provided. Where an adviser and/or the products being advised pose a higher risk, then a greater proportion of these files should be reviewed.

A file review should first and foremost assess the suitability of the advice given. Is the product right for the client given their personal circumstances, needs and objectives?

Ensuring the client can afford the recommended products is also very important. This means that the client must be able to afford the payments both now and given any changes in personal circumstances the adviser could reasonably foresee, e.g. childbirth, impending unemployment, retirement.

Does the fact-find or similar document contain enough information about the client and their needs and objectives to be able to advise them properly?

Does the file evidence why a particular provider and product was chosen?

Does the suitability report fully explain why any recommendations have been made, and does it fully explain the product’s key features and risks?

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.