Evidencing Suitability

How hard can it be?Neil Walkling and Jenny Young

16th June 2016

Agenda

1. How did we get here?

2. Common suitability failings we see and how to avoid

them

3. Financial planning suitability considerations

4. Controls over quality of advice

5. Key takeaways

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How did we get here?

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2011 - Dear CEO

2011 – FG11/05 Risk profiling and investment selection

2015 – Thematic: suitability of investment portfolios (15 firms)

2016 – S166s following 2015 review

– Thematic: suitability of advice (700 firms)

– 2015 thematic follow-up review

2017?

2012 – FG12/06 Replacement business and CIPs

2010 - Thematic: suitability of management portfolios (16 firms)

2013 – Clive Adamson speech on Supervision of Wealth Managers and Private Banks

Patience

Progress since 2011?

In the 2015 FCA suitability thematic, of the files

reviewed were:

found to be unclear or demonstrate a high risk of

unsuitability?

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70% 40% 60%

Let’s get back to basics – Suitability 101

What is the purpose of each question on your

client profile?

How does the answer to each help you to

evidence suitability?

Free-text boxes and/or meeting notes?

How do you use the information you collect?

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Effective client profiling

Let’s get back to basics – Suitability 101

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Effective Client Profiling

Basic KYC – do you really know your client?

We often see holes in the files we review, where basic KYC

information on the client has not been recorded or has been captured

in a format that it isn’t meaningful. These regularly include:

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Income and expenditure

Change in circumstances

Family wealth

Health

Financial objectives – how to get it wrong

Vague objectives

– “Your financial objective is income”

Ill-defined or conflicting time horizon

– “Your time horizon is somewhere in between the lifespan of a

mayfly and a dolphin”

Conflicting indicators on file – no analysis/review of client

information

“Your financial objective is to mitigate your IHT liability. You wish

to gift your entire estate to Battersea Dog’s Home”

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Unfogging objectives - how to get it right

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Objectives should be specific and tailored to the

individual client, clearly outlining what they are

looking to achieve with their assets.

The time horizon should be in line with the

client’s financial objective and risk profile and

the adviser should review these in tandem to

ensure they are consistent.

K&E – why do you ask?

Which piece of information is least useful for

assessing investment K&E where a client is looking

to open a new investment portfolio?

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Holds the

CFA

Has

previously

had a

managed

portfolio

Worked

for 15

years at

Barclays

K&E – What you should be asking

Have you gained any knowledge of particular

investments through your current/former

occupation or profession?

If yes, please describe the nature of the role and the

relevant types of investments.

Do you hold any qualifications relating to

investments or financial advice?

If yes, please tell us:

• Name of the qualification

• Awarding body

• Year it was awarded

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Risk profiling - still not up to scratch

s166 notices we’ve seen that resulted from 2015 suitability thematic

include a requirement for the Skilled Person to:

• Undertake a review of the firm’s current approach to ensuring the

suitability of investment portfolios, including the firm’s approach to

collecting and recording its client risk profiles…

• Carry out a review of a sample of XX client files to assess the

suitability of investment portfolios, including the process and practice

used to establish these clients’ risk profiles.

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Risk profiling – what do you do?

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Questionnaire:

external risk

specialist

Internally

designed

questionnaire

Risk

categories

and

descriptions

Which of the following methods do you use to risk

profile your clients?

Risk profiling – how to get it wrong

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Patchwork risk questionnaires seemingly cobbled together by magpies

Over-reliance on output from risk profiling tools

No separate capacity for loss assessment by adviser or evidence that client’s K&E has been factored in

Unexplained changes or discrepancies

Risk profiling – how to get it right

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Solid, tested methodology that maps to solutions

Clearly defined and meaningful risk categories

Visuals – illustrate volatility/portfolio make-up

Separate consideration of capacity for loss and

knowledge and experience by adviser

Adviser judgement and client interaction

Ongoing suitability – getting it wrong

Out-of-date client information

– Not updated for several years, no client response, no

resolution, not sustainable indefinitely

No evidence of regular or ongoing contact with clients

– Absence of meeting notes, telephone notes, email

exchanges…

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What does ‘out of date’ mean?

How frequently does the FCA recommend you review

client information for a managed portfolio?

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Every 2

years

There is

no

guidance

At least

annually

Ongoing suitability – how to get it right

One approach that could make sense:

Annual check-in letter

Biennial review conversation, plus regular contact

Escalation process to agree action for elusive clients

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Wealth planning suitability considerations

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Healthily holistic or maddeningly myopic?

We discussed all aspects of your finances, but you asked me to

focus on your pension arrangements

We discussed your protection needs but you do not wish to

review them at present

‘You do not wish to involve your wife at this stage’ or ‘My

partner’s finances are separate’

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Healthily holistic or maddeningly myopic?

We discussed your protection needs but you do not wish to

review them at present

‘You do not wish to involve your wife at this stage’ or ‘My

partner’s finances are separate’

Any focusing of advice should be driven by individual client,

not by adviser

We have a duty to highlight higher priority needs we identify

Assume clients care about financial security of other

household members

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Analysis or paralysis?

‘I am confident that the potential for outperformance should

outweigh the higher costs’

Client is in poor financial shape, but no sign adviser has

recognised it or proposed action to address

‘You want discretionary investment management’

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Analysis or paralysis?

‘I am confident that the potential for outperformance should

outweigh the higher costs’Need robust evidence/analysis to support solutions involving

higher costs

Solutions should be based on (real) objectives, not the other

way around

Recommend what’s in the client’s best interests, even if you

think that’s not what they want to hear

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Problems posed by poorly planned proposition?

• Proposition based on the needs of clients?

• Adviser or an asset gather?

• Is the scope of your CIP consistent with your advice scope?

• Are you more restricted than you’re letting on?

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New Centralised Investment Proposition (‘CIP’)?

Things to consider:

Have you properly identified your target

market before agreeing your CIP design?

What advice needs can’t you effectively meet,

and will your advisers be frank with clients?

What are you incentivising advisers to do,

intentionally or otherwise?

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Outcome-based monitoring

Focus on good client outcomes not process following

Robust and well-defined monitoring process in place

• Independent advice quality control function – not compliance

• Unbundle suitability outcome from other file issues (AML, fee

disclosure etc.)

• Identify remedial actions and don’t let them drift

• Supervision and adviser competence – failure regime

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What approach do you use?

Tick-box approach Outcomes-based approach

Has the client information

document been fully

completed?

Has sufficient information about the

client's personal and financial

circumstances been gathered to

support the recommended solution?

Has the risk questionnaire

been correctly completed?

Has the client's risk profile (attitude to

risk and capacity for loss) been

appropriately established?

Does the suitability report

include the mandatory

paragraphs for this type of

advice?

Does the suitability report allow the

client to make an informed decision

about whether to accept the

recommendation?

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How to make sure you get it right

Governance and management controls:

“We expect firms to have adequate and effective front line control

mechanisms that identify and reduce risk to customers…It is a firm’s

senior management that is responsible for putting oversight

arrangements and controls in place that are right for their business

needs and ensure good outcomes for their consumers”

FCA 2015 (TR 15/12)

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So what next?

• When was the last time you reviewed your suitability assessment

arrangements?

• Is there ownership of suitability in your organisation?

• Is there understanding and buy-in at senior management level?

• If you got a letter asking for 50 sample file tomorrow would you be

comfortable providing them?

There is no quick fix – suitability stems from root to tip – you

must ensure that good consumer outcomes are at the heart of

the business and that processes/controls are in place to support

this…

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Any Questions?

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