Risk managers will be well aware that there is a vast amount of work emanating from the Financial Conduct Authority on the topic of suitability.
This is a challenging area to get right. Advice may be given with every good intention, but things can still go awry. In terms of avoiding censure, it is vital to follow procedure and to ensure these are properly documented.
Meanwhile, in the past, there are plenty of examples where suitability was given little or no consideration and the vast mis-selling of PPI is a case in point - a product of potentially no or little value sold to customers often unknowingly. This has cast a shadow over the industry and in the case of pensions or investment mis-selling the consequences in terms of consumer outcomes can be devastating.
So, in its latest work, these were the areas closely examined by the regulator in a review that covered more than 650 firms and nearly 1,200 individual pieces of advice.
Firms are largely doing a good job
The research was completed this May and the results were mainly positive, since the regulator found in 93.1% of cases, suitable advice was provided. It also found in only 4.3% of cases was unsuitable advice provided, while in just over 5% there was uncertain disclosure provided and only 2.5% of cases provided unclear advice. Even so, the regulator has said there is still room for improvement and its focus will remain on suitability, including on standards within the wider financial services industry.
Time for an in-house review?
So is suitability, in terms of advice and product selection, an area risk managers should be looking at afresh? These are just some of the relevant issues related to suitability that could need reviewing:
Customers will have many different requirements but compliance can only be achieved if there is consistency. Regulation consultants often refer to an iterative approach – so it’s often a question of providing guidance in the same format and making sure that information is properly recorded.
Disclosure of costs and risk
Any charges – to include the total price - must be clearly explained to customers. Equally, it must be made explicit to clients that in the case of an investment product, there will be risk and the level of this should be explained in-depth.
This is largely an issue related to pensions, as there are unscrupulous operators in the sector looking to encourage people to unlock or switch pension pots in exchange for large fees. Again, if this is an area where advice is given, there needs to be proof to show the customer’s best interests are being taken care of.
Some customers will simply say they want an affordable mortgage or some cash aside for a rainy day. If they later end up dissatisfied, the adviser may find they have little defence if it is shown that demands and needs were not properly investigated and reasons given why a particular product was recommended. It could be that advisers may need to go back to such customers and make sure there is clearer information provided.
The FCA has said its work on suitability will continue and in 2018, it will conduct a further review, looking at the impact of new regulation such as the Markets in Financial Instruments Directive II (MiFID II), the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) and the Insurance Distribution Directive (IDD).
This is always going to be challenging area, particularly where advice is a major part of a firm’s proposition. But since it carries so many potential risks, it needs regular assessment – suitability is a serious issue indeed.