FCA technical specialist suggests many suitability reports are too complex

What to include and what not to include in a suitability report (or suitability letter, reasons why letter, demands and needs statement etc) can be a thorny issue for many financial advisers. Striking the balance between a document that is so long that the customer does not read it at all; and a document that does not cover the necessary breadth of issues to protect the adviser can be very difficult.

Rory Percival, a technical specialist at the Financial Conduct Authority (FCA), has suggested that many firms over-react and put more into these reports than the regulator requires.

Speaking to the Personal Finance Society conference, he remarked:

“We have been saying for years that suitability reports need to be improved. In many, perhaps most, cases we see suitability reports that seem to be geared to the firm’s purposes as a defensive measure from potential future claims from the Financial Ombudsman Service, rather than designed to communicate with clients.”

Mr Percival then added:

“You need to explain recommendations in a way that clients understand,” and summed up the regulator’s opinion by saying: “We continue to find

[reports] to be too long, poorly structured, and unengaging.”

Mr Percival’s words though may have highlighted the real problem, which is that compliance requirements are often dictated by the theoretical possibility that any case could eventually result in a complaint, on which the Financial Ombudsman Service will adjudicate. ‘If it’s not written down, it didn’t happen’ is a common mantra in the compliance arena.

The FCA factsheet on suitability reports simply state that the following items need to be included:

  • The reasons for the recommendations, and how these recommendations address the customer’s objectives
  • The risks associated with the recommended products
  • The costs and charges of these products
  • Whether advice was offered in all areas, or whether focused or limited advice was offered
  • Where the recommended product replaces another product, a like for like comparison of what the two plans can offer in terms of features, risks, costs etc

The factsheet does address the issue of the length of the reports, and suggests that one possible solution may be to include general technical information in an appendix at the end of the report.

Examples of good practice, according to the FCA, include:

  • Highlighting key points in bold
  • Quoting the client’s own words from the review meeting when explaining client needs and objectives
  • Preparing the report in advance of the presentation meeting, and discussing it with the client at that meeting

The last of these differs from the traditional approach, where the suitability report was something that was sent after the advice process had completed.

Above all, whether they are long or short, reports should use plain English, avoiding jargon wherever possible, and must comply with FCA Principle 7, which requires that client communications are “clear, fair and not misleading”.

Unfortunately, given the number of different products which independent advisers can offer, and the need to tailor reports to the individual circumstances of each client, it is not feasible to expect the FCA to produce report templates that firms can use.

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.