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Firms Need to be Mindful of False Reassurance from FCA’s Suitability Review Findings

19/05/17

The FCA has published the much awaited findings from the Assessing Suitability work it has been carrying out. TCC’s Phil Deeks examines the findings and what the industry can expect from the regulator going forward.

Overall suitability came out high at 93.1% overall whilst disclosure was less positive with only 52.9% providing appropriate disclosure. Whilst the 93.1% is likely to grab all the headlines; firms need to be mindful of any false reassurance they draw from this figure. This figure is focussed on whether the client ended up with a suitable solution rather than whether firms could evidence the suitability of their recommendations. The FCA specifically highlighted failings in relation to initial disclosure and quality of suitability reports (specifically too long and/or complex) but these would not have impacted the suitability figure, although the regulator notes that these are persistent issues, previously highlighted during the 2014 RDR thematic work. Rest assured that the FCA’s focus on suitability will continue to be an area of high focus as it remains arguably the largest inherent risk in the sector.

However, the waiting will continue as rather than a singular comprehensive report, the FCA plans to drip feed out good and poor practices over the coming months and across a number of different mediums as part of a wider communication strategy which will extend into 2018. Whilst this will ensure that Suitability will maintains its profile over the next period, it will miss out on the impact a consolidated good and poor practice or guidance consultation would have had, an approach previously adopted by the regulator.

The rest of the paper outlines the high level findings from the review; split by type of advice, type of firms, advice area etc. Two key areas the FCA highlighted within its consideration of suitability were risk profiling and replacement business, where process weaknesses were uncovered. Firms would be wise to consider the published guidance in each of these areas and review their own processes to identify and mitigate any risks or weaknesses uncovered.

As indicated in the Business Plan, the FCA has confirmed that they will formally re-run this exercise in 2019 based upon advice given in 2018, following the implementation of MiFID II, PRIIPS and IDD and will be conducting specific work in relation to target firms provide unsuitable advice on complex products as highlighted in the Business Plan.

Crucially, the report does conclude that the FCA will not materially alter its supervisory approach based upon the findings of its Assessing Suitability work as the differences are relatively small.

 

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