The matter of suitability letters and reports has exercised the minds of advisers over the years. For some, they are a necessary evil to satisfy compliance. For better advisers, they are a means of informing the clients about financial planning arrangements that are being made and why the client will be better off after following their advice.
Suitability letters have evolved over the years. Originally, they were letters advising clients about the policies they had bought. However, they evolved into a means of covering every element of a product, whether discussed or not, as a means of showing that the customer has received full advice as a back-covering measure against possible complaint or a review by the Financial Conduct Authority (FCA).
These types of letters are still produced by networks and advisers that do not really know what they are doing, in the erroneous view that the letters will protect them in the case of complaint or review. The Financial Ombudsman Service (FOS) and the FCA have moved towards a view that these long letters are not “treating customers fairly”, as customers cannot be expected to read and understand all the technical terms in the letters and therefore they could not be relied upon as defence against complaints.
It is a tricky balance between providing the client with a letter confirming a financial arrangement that has been made in a language they can understand, and producing a document that contains sufficient information to ensure nothing important has been missed.
I attended a positive compliance workshop in late 2014 where the FCA representatives gave clear guidance about the current thinking of the FCA. This guidance has been in development and is due to be issued shortly. The notes below are taken from the FCA factsheet No 023 for investment advisers.
>What does the FCA expect from you?
Suitability reports explain to the customer how and why your recommendations meet their needs and personal goals. They should be clear, fair and not misleading. So for each suitability report, you should consider whether it:
• Is tailored to your customer.
• Uses clear and plain language.
• Explains the reasons for all recommendations and how they relate to the customer’s objectives.
• Highlights the risks associated with the recommendations.
• Explains the costs, charges and potential penalties attached to the recommendations.
• Provides a balanced view.
• Highlights if you have omitted any objectives.
• Highlights how the customer will be advantaged or disadvantaged by the advice.
• Shows evidence of comparisons on a like-to-like basis where an existing plan has been cancelled and a new one devised.
Good practice examples
When preparing and issuing suitability reports, remember that customers are less likely to consider the recommendations being made if the report is too long. Instead, you could put technical information in an appendix.
Here are examples of some other good practices the FCA has seen firms employ:
• Giving a clear summary of the customer’s objectives, needs, priorities and relevant existing investments, demonstrating the adviser had taken account of these.
• Using bold text to highlight key risks and changes associated with the recommendations.
