It’s been on the agenda for ages, and yet suitability remains the FCA’s over-riding concern in the Wealth Management and Financial Advice sectors. We’re now five years on from the 2011 ‘Dear CEO’ letter, but it’s clear from recent supervisory activity that the regulator believes the majority of client files are still failing to evidence suitability. The recent spate of s166 skilled person notices, issued in the wake of the 2015 wealth sector suitability review, are a sure sign that patience has run out.

1. Evidencing Suitability
How hard can it be?
Neil Walkling and Jenny Young
16th June 2016

2. 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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3. 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

4. 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%

5. 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

6. Let’s get back to basics – Suitability 101
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Effective Client Profiling

7. 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

8. 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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9. 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.

10. 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

11. 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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12. 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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13. 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?

14. 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

15. 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

16. 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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17. 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

18. 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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19. Wealth planning suitability considerations
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20. 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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21. 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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22. 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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23. 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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24. 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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25. 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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26. 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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27. 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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28. 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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29. 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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30. Any Questions?
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