Evidencing Suitability

Transcription

1 Evidencing Suitability How hard can it be? Neil Walkling and Jenny Young 16 th 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 2

3 How did we get here? Thematic: suitability of management portfolios (16 firms) Dear CEO 2011 FG11/05 Risk profiling and investment selection 2012 FG12/06 Replacement business and CIPs 2013 Clive Adamson speech on Supervision of Wealth Managers and Private Banks Patience 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? 3

4 Progress since 2011? In the 2015 FCA suitability thematic, of the files reviewed were: 70% 40% 60% found to be unclear or demonstrate a high risk of unsuitability? 4

5 Let s get back to basics Suitability 101 Effective client profiling 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? 5

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

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: Income and expenditure Change in circumstances Family wealth Health 7

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 8

9 Unfogging objectives - how to get it right 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. 9

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? Holds the CFA Has previously had a managed portfolio Worked for 15 years at Barclays 10

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 11

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. 12

13 Risk profiling what do you do? Which of the following methods do you use to risk profile your clients? Questionnaire: external risk specialist Internally designed questionnaire Risk categories and descriptions 13

14 Risk profiling how to get it wrong 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 14

15 Risk profiling how to get it right 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 15

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, exchanges 16

17 What does out of date mean? How frequently does the FCA recommend you review client information for a managed portfolio? Every 2 years There is no guidance At least annually 17

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 18

19 Wealth planning suitability considerations 19

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 20

21 Healthily holistic or maddeningly myopic? Any focusing of advice should be driven by individual client, not by adviser We discussed your protection needs but you do not wish to review them at present We have a duty to highlight higher priority needs we identify Assume You clients do not wish care to involve about your financial wife at this security stage or My of other partner s household finances members are separate 21

22 Analysis or paralysis? I am confident that the potential for outperformance should outweigh the higher costs You want discretionary investment management Client is in poor financial shape, but no sign adviser has recognised it or proposed action to address 22

23 Analysis or paralysis? Need robust I am evidence/analysis confident that the potential to for support outperformance solutions should involving outweigh the higher costs 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 23

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? 24

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? 25

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 26

27 What approach do you use? Tick-box approach Has the client information document been fully completed? Has the risk questionnaire been correctly completed? Does the suitability report include the mandatory paragraphs for this type of advice? Outcomes-based approach Has sufficient information about the client's personal and financial circumstances been gathered to support the recommended solution? Has the client's risk profile (attitude to risk and capacity for loss) been appropriately established? Does the suitability report allow the client to make an informed decision about whether to accept the recommendation? 27

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) 28

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 29

30 Any Questions? 30