The subtleties of suitability
IFAs can expect guidance from the FCA about how to produce shorter client suitability reports following last month's publication of the Financial Advice Market Review (FAMR), the FCA has confirmed.
Readers may recall from Esme's blog last month that FAMR was set up to investigate the so-called "advice gap" at the heart of the industry. In order to plug the gap, FAMR focussed on ways to reduce the cost of financial advice. One of the areas considered was the production of "suitability reports". FAMR discovered that IFAs were adopting different approaches to the production of suitability reports and there were varying degrees of uncertainty amongst IFAs of what level of information should be included.
In order to correct this problem, FAMR recommended that "the FCA and industry should continue to work together with the aim of bringing about improvements to suitability reports, reducing their length, where appropriate and the time firms spent preparing them."
So what will the "improvements" be? Firstly, it is important to note that FAMR is not recommending a rewrite of the FCA's conduct of business sourcebook (COBS). In any suitability report, the IFA is still required to:
- specify the clients demands and needs;
- explain why the firm has concluded that the recommended transaction is suitable for the client having regard to the information provided by the client; and
- explain any possible disadvantages of the transaction for the client.
On the back of FAMR's recommendation, Ed Smith (the man who headed-up FAMR) confirmed last week that the FCA will be providing IFAs with "guidance" on suitability reports and stated that the FCA will be "creating templates with which we can give the industry confidence to use shorter suitability reports". This implies that if the guidance or templates are followed by the IFA, in order to provide "punchier" advice, then the IFA should meet the requirements of COBS (above).
This is welcome news but it remains to be seen whether the forthcoming guidance or templates work in practice. One of the main reasons why some suitability reports are long and vary across the industry is that IFAs are concerned that their advice will be deemed inadequate by FOS. Therefore, the acid test for these reforms will be how FOS responds to a complaint about a suitability report in circumstances where an IFA has followed the FCA's guidance or templates.
If IFAs follow the new guidance in good faith, but FOS repeatedly finds (for whatever reason) that advice is incomplete or unsuitable, we can foresee a situation where industry confidence in the reforms quickly fades. IFAs would regress to more comprehensive and detailed advice so as to avoid complaints. However, if FOS adopts a pragmatic approach and appreciates the reasons why a shorter suitability report has been provided to a particular client, we would hope that FOS would find in favour of the IFA if the advice was (on the whole) suitable.
Of course, at this stage, it is not clear what the FCA's guidance or templates will be or how FOS will react in any given case to a shorter suitability report. Recent form suggests the FCA will be reluctant to impose anything on FOS. For now, then, the subtleties of suitability remain.