FCA initial report on assessing suitability review
Written by Charlie Palmer on 10/08/2018

On 18 May 2017, the FCA published its long awaited report setting out the findings from its review into the market for pensions and investment advice. The review was launched in April 2016. Comments and blogs from various high profile persons show how important this review has been to the industry. 


The purpose of the review was to assess a statistically robust sample of advice files that allowed the FCA to draw conclusions on the suitability of advice and quality of disclosure in the sector as a whole. The review assessed 1,142 individual pieces of advice, given by 656 firms, against the suitability and disclosure rules in the Conduct of Business sourcebook (COBS). 


The FCA found the overall results positive, with the sector providing suitable advice for 93.1% of cases and acceptable disclosure in 52.9% of cases. However, it identified concerns relating to matters including the following:

  • Risk profiling. Some firms did not consider or mitigate the limitations of the risk profiling tool that they used, or the recommended solution did not match the risk that the customer was willing or able to take.
  • Replacement business. Some firms recommended that customers give up valuable guarantees without good reason, or where the additional costs appeared to outweigh the benefits of the recommended solution.
  • Initial disclosure. The FCA found that the main area where there is unacceptable disclosure is with regard to initial disclosure. In particular, firms disclosed an hourly charging structure but did not provide an approximation of how long each service was likely to take. Also, firms used charging structures with a wide range.


Firms are expected to consider the results, particularly the areas where the FCA has flagged continuing concern, and consider whether there are any areas where they can improve.

The FCA intends to provide more information on its review over the course of 2017 and into 2018 and will share more detail on its findings, including examples of good and poor practice. It will focus on the areas where there is scope for improvement. These include disclosure, replacement business and risk profiling and mapping to investment solutions.

The FCA also intends to repeat its review in 2019, based on advice delivered in 2018.

Comment: 

The FCA spun this result as a positive, when in reality the results are depressingly similar to previous thematic reviews. Linda Woodall at the FCA wrote: “We believe they are due to the successful adoption of the Retail Distribution Review (RDR) by advisers and reinforced by our previous supervisory and enforcement activities”

Close inspection is demanded so that we don't pat ourselves on the back and forget the underlying facts for now. Advice was unsuitable in 16% of cases in 2008 Pension Switch Review, but only 4.3% of cases in this 2016 review. So that is, for sure, improvement, but that first thematic review was for pension switches, which are high risk and at least twice as likely to fail than a wider thematic review across all business types.  Some improvement in eight years, but more required. So how about the results for the “unclear” categories?

The 2008 review showed roughly 60% of files were either unsuitable or unclear. That figure is now roughly 50% in this review. I use the word roughly because the statistics are not easy and are very carefully presented by the FCA. You need experience to unpick this, that comes from working through the percentage of unsuitables that will result from unclears and so on. But whatever way you look at it, there are a very high number of files that don’t cut it first time out under independent analysis.

In the end, if you cannot prove suitability, then many argue the file is, therefore, unsuitable. That is a binary outcome. And if the file is unclear, then the FOS will almost always find against you. This could easily have been a headline of “only half of files can prove suitability”.

Message to IFAs?  Be kind to yourself.  It is not easy because financial services is the most complex business and that's why you're paid a lot of money.

Get a process and system validated, such as Bat - Reg Tech online risk management system and then follow process and prepare for the 2019 review.


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