What the FCA wants to see from advisers on suitability

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The FCA has begun contacting about 700 advice firms as part of a wide-ranging review of advice suitability which will cover investments, pension saving and retirement income.

The regulator plans to collect more than 1,000 client files in total as part of the supervision exercise, with file requests mainly targeted at 500 smaller firms.

Larger firms will have to provide a greater number of files, which should reflect the business’s market share.

The FCA letter asks firms for the total number of “advice events”, defined as a single product recommendation. Advice to a couple to take out a product would count as two advice events.

The regulator has also requested a copy of “advice registers”, a record of personal recommendations to include all advice provided during 2015. This should cover recommendations to encash or surrender, as well as referrals to discretionary fund managers.

As part of the advice register, firms will have to detail the number of advised cases including those for insistent clients, any records of funds withdrawn from a client’s pension, and any records of portfolio rebalancing.

Firms will be contacted in May or June with instructions to hand over specific clients’ files.

File reviews are expected to centre on assessing suitability, including copies of suitability reports and the way firms document their investment and research processes.

Clarke Willmott solicitor Laura Hazell says the review may have been sparked by February’s National Audit Office report, which questioned the FCA’s ability to show its effectiveness on misselling.

She says: “They were saying that the FCA does take lots of action on misselling but it can’t measure the effectiveness of the steps that it takes. So it may be that they have decided that prevention is better than cure, and they want to pay closer attention to what is going on at the outset as a way of addressing the outcome of that report.

“A lot of firms are going to be quite shocked, and even if they have done nothing wrong, it’s bound to make some of them nervous.”

In the FCA’s 2016/17 business plan, published this month, the regulator identified suitability as one of its key risk areas for the coming year.

It said: “Advisers may not always give consumers the most suitable investment advice, may offer a limited range of products or have staff reward schemes that motivate sales over suitability.”