Regulatory update: The FCA's assessing advice suitability review – the results

Posted: 26th May 2017

Background

The FCA published a report on the 18th May 2017 setting out the findings of the suitability assessment work it has been carrying out in the pensions and investment advice market.

The purpose of the review was to assess a statistically robust sample of advice files, allowing the FCA to draw conclusions on the suitability of advice and quality of disclosure across the sector.

The FCA’s 2016 / 17 Business Plan highlighted advice as one of its seven priorities, with the Assessing Suitability Review (“the review”) initiated in 2016 to provide additional support to the sector for firms to deliver suitable advice.

The results of the review will be used to:

• Measure how the sector is performing
• Identify areas where the sector is meeting the rules and expectations
• Enable the FCA to communicate examples of good and poor practice
• Allow the FCA to focus resource on firms and areas that pose the greatest risk to customers
• Measure the impact on the sector of future regulatory interventions

Key Points

The review assessed 1,142 individual pieces of advice given by 656 firms against suitability and disclosure rules in the Conduct of Business Sourcebook (COBS).

Findings on suitability

• Overall, the review identified that the sector delivered suitable advice in 93.1% of cases, unsuitable advice in 4.3% of cases and unclear advice in 2.5% of cases
• In relation to investment advice, the review identified that suitable advice was provided in 94.8% of cases, unsuitable advice in 3.8% of cases and unclear advice in 1.4% of cases
• In relation to pension accumulation products, the review found that suitable advice was marginally lower at 89.6% of the cases with 5.5% being unsuitable and 4.9% being unclear
• In relation to retirement income products, 90% of advice was deemed suitable, 5.1% unsuitable and 3.9% unclear

Overall, the FCA considers the results on suitability to be positive; however, the review identified common issues in two areas:

• Risk profiling – where firms did not consider or mitigate against the limitations of the risk profiling tool they used, or where the recommended solution did not match the risk the customer was willing to take
• Replacement business – where firms were recommending that the customer gives up valuable guarantees without robust justification, or where the additional costs appeared to outweigh the benefits of the recommended solution

Findings on disclosure

The assessment of disclosure was also significant, where the FCA considered three specific areas: the firm’s initial disclosure, the product disclosure and the disclosure in the suitability report.

• The FCA identified that in 52.9% of cases the sector provided acceptable disclosure
• In 41.7% of cases, unacceptable disclosure was provided
• In 5.4% of cases, the sector provided uncertain disclosure

The review identified that most issues lay with firms’ levels of initial disclosure, including costs and charges. The primary issues were:

• Firms disclosing charging structures within wide ranges
• Firms using hourly charging rates and failing to provide an indication of the number of hours for the provision of each service

Regulatory next steps

The FCA has highlighted that this review signifies the beginning of a communication programme which will run throughout 2017 and into 2018. It intends to share more details on the findings, including examples of good and poor practice, through various channels, for example, through written publications, digital media and speeches. It also intends to build it into its future Live and Local programme events.

The FCA intends to repeat the review in 2019, to measure against the current results to examine how they have changed. This will also allow the regulator to assess how firms have implemented the requirements introduced by the Markets in Financial Instruments Directive II (MiFID II), Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) and the Insurance Distribution Directive (IDD).  

Considerations for firms

The results highlight that, generally, customers receive a good standard of advice. However, the disclosure of product charges and disclosure in suitability reports provide some cause for concern.

It was noted that some of the reports were too long and / or complex. Disclosure is an integral part of the advice process as it helps customers make informed decisions about their financial affairs. Therefore, firms should ensure they convey the information clients require in a way that is clear and easy to understand.

Firms should also be preparing for the important changes coming to advice and disclosure requirements through MiFID II, PRIIPs and the IDD.

Read the full findings of the FCA’s review.