How to meet FCA standards on suitability and disclosure

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The Financial Conduct Authority this week released the findings of its Assessing Suitability Review.

The review looked into the suitability of the advice offered by the pensions and investment market, and the quality of disclosure in the sector.

It assessed 1,142 individual pieces of advice given by 656 firms against the suitability and disclosure rules in the regulator’s Conduct of Business sourcebook.

The findings show that most firms are providing suitable advice – but the story on disclosure is less rosy.

Firms performing well on suitability

The findings show that:

  • in 93.1% of cases, the sector provides suitable advice
  • in 4.3% of cases, the sector provides unsuitable advice
  • in 2.5% of cases, the sector provides unclear advice

The FCA attributes these positive results to ‘the successful adoption of the Retail Distribution Review by advisers…reinforced by our previous supervisory and enforcement activities’.

Nearly half of firms fail on disclosure

The findings on disclosure are far less positive.

In nearly half of cases, firms’ performance is unacceptable or uncertain:

  • in 52.9% of cases, the sector provides acceptable disclosure (i.e. the regulator’s requirements have been complied with)
  • in 41.7% of cases, the sector provides unacceptable disclosure (i.e. rules have not been complied with)
  • in 5.4% of cases, the sector provides uncertain disclosure

‘Disclosure’ in this context relates to firms’ information on charges. The Authority says that it is:

‘an important aspect of the advice process as it assists customers in making informed decisions about their financial affairs.’

How to deliver what the FCA is looking for - suitability

Firms are clearly doing well on suitability. As we pointed out in a previous blog, ensuring the advice you provide is suitable is largely about having a culture of good governance.

If you want tips on how to achieve this culture, our blogs on how to identify the red flags that indicate there’s a problem with your corporate culture and our five tips for embedding a compliance culture into your business will help.

Make sure that your customer is at the heart of your marketing, sales and advice processes and you won’t go far wrong on suitability.  Read more about this in our blog on how to convert client care promised into action.

How to deliver what the FCA is looking for - disclosure

In the past, the way firms have disclosed certain information has been very prescribed. Last year the FCA did away with templates for some key disclosure documents – giving firms more autonomy over the way they provide information.

In many ways, this is a positive for firms, moving compliance away from being a box-ticking exercise and giving more freedom as to how they choose to disclose.

The flip side of this, of course, is that firms now need to be more proactive in ensuring they include the right, and sufficient, information in their disclosures.

This is where a culture of good governance comes in. You need to make sure your communications support an ethos of treating customers fairly.

What's coming next?

As the regulator says in its release of the review findings:

‘Some important changes are coming to the advice and disclosure requirements through the Markets in Financial Instruments Directive II (MiFID II), the Packaged Retail and Insurance-based Investment Products regulation (PRIIPs) and the Insurance Distribution Directive (IDD).’

Firms will need to ensure that they have a full understanding of the MiFID II and PRIIPs requirements (read more about what PRIIPs is and how to comply and email us for a copy of our soon-to-be-released Guide to MiFID II).

The regulator will be starting a communication programme about disclosure in 2017, which will continue into 2018. It also intends to repeat the review in 2019, enabling it to see how advice in 2018 has been changed by its recommendations, as well as by the MiFID II, PRIIPs and the IDD requirements.

Creating a culture of compliance

As we highlighted above, a compliant culture that is entrenched into your firm’s DNA is a crucial building block for good governance.

As identified by the regulator, this type of culture is essential if firms want to improve their performance on disclosure and continue to deliver suitable advice.

If you want a more in-depth look at how to achieve an ethos of good governance, you can read our whitepaper on the subject, How to embed a compliance culture into your business. It’s free and you can download it here.

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