The six most common suitability fails tripping up advisers

As an outsourced compliance firm, one of our main services is file checking. What we often see is good advice given, but poor disclosure and processes being followed.

When we speak to professional indemnity insurers, they say they pay out more often because of bad quality files and a lack of disclosure and processing than they do for poor advice. The Financial Ombudsman Service has confirmed this.

In its 2017 assessing suitability review, the FCA found that 93.1% of the cases it looked at were suitable in terms of the advice provided but only 52.9% were suitable when it came to ‘disclosures’. To you and me, that means explaining to the client in simple terms what the service is and how much it is going to cost.

If you think this element is not as important as the advice you give, you are wrong.

It is crucial to have good processes in place to create a strong audit trail. Without it, you could be putting your business at risk.

The basics

Having a complete set of ‘know your customer’ facts on file should straightforward enough. That means no gaps in income and expenditure data, and crystal clear client objectives.

Both should mean you can give recommendations in line with clients’ attitude to risk, capacity for loss, knowledge and experience.

Add into the pot your relevant disclosures and an audit trail showing the client was in receipt of all the information they needed to make an informed decision and, voila, you’re pretty much done.

Naturally, there are technical elements required to demonstrate suitability and how the advice was arrived at, but that should be a given as part of the ‘reasons why’ section in your suitability reports.

Despite these basics, we see the following commonplace failures in file reviews all the time:

  • Initial disclosure documents not being provided at the outset;
  • Client-specific fees not being disclosed at the earliest opportunity;
  • Suitability reports and illustrations dated after applications;
  • Key information (needed to justify advice) missing from files;
  • Costs and charges comparisons laid out in a way that even the adviser can’t make head nor tail of them (or, worst still, missing entirely);
  • Incomplete assessments of clients’ attitude to risk, capacity for loss and financial experience.

All too often we see files not personalised to the client. That is my personal bugbear.

The advantages and disadvantages of a specific strategy, risk warnings, justification of extra costs and details of alternative ideas considered are too often templated, and are thus not linked to the specific recommendations made for the individual client or, worse still, their personal circumstances.

Unsurprisingly, this leads to files being deemed unsuitable, when just a few changes would transform a bad file into a good one. I’m not one for clichés but, as the saying goes, you only get out what you put in.

You will never please the regulator with lazy work.

Dos and don’ts

That 2017 assessing suitability review was just the start. We are now expecting a major report from the second part of that FCA review.

We anticipate its scope to be widened to look at overall file quality and the clarification advisers should be providing to demonstrate value. We cannot say we have not been warned.

It is not too late to make changes, so here are some tips:

Do:

  • Answer the question: ‘Why is the advice been given now?’;
  • Keep it short and simple;
  • Create and follow processes. Put yourself in the shoes of a third party assessing your file who doesn’t know what you know;
  • Document your assessment of your client’s capacity to make financial decisions, including their vulnerability where relevant.

Do not:

  • Repeat fact-find information in your report;
  • Regurgitate clients’ objectives as your recommendation;
  • Keep the important bits for the back of your report;
  • Mess with or try to vary the conduct of business sourcebook processes – they are there for a reason.

It is all pretty straightforward.

Above all else, remember this: it matters not how good your advice is. If your file process is poor, you are heading towards a red mark.

Make the time to build a process that works for you, your team, your business and the regulator.

In the last resort, this is exactly what your compliance team is for, so turn to them with your concerns.

Christian Markwick – Head of Adviser Support

 

The six most common suitability fails tripping up advisers