Improving the suitability of financial advice – Fact finding and reporting

The following Speech by Debbie Gupta, Director of Life Insurance and Financial Advice Supervision at the FCA, delivered at Money Marketing Interactive Conference 2019, Harrogate addressed the thorny issue of Improving the suitability of financial advice – Fact finding and reporting

The full speech is linked below, and the following extract provides some thought leadership on financial advice – Fact finding and reporting

The foundation of suitable advice is getting to know your client and understanding their circumstances and motivations. In practical terms, this means:

1. Spending sufficient time getting detail on a client’s needs and objectives provides a secure foundation for the advice process.
   1. A good fact-find records the client’s objectives – why it’s their objective and what achieving their objective means for them. So, for example, instead of recording the client wants flexibility, record something more specific such as the client wants to semi-retire, set up a part-time consulting business, and this will give them more free time to spend on their allotment.
2. Capture and record essential information. Although COBS 9 and 9A may not give you a list of what this means, it is better to record everything that is relevant to the advice being given.
   1. For example, we still see DB transfer files where the adviser has not recorded details of other pensions, the state pension due, or the client’s expected income in retirement. This is essential information.
3. Capture and record soft facts.
   1. They add context and help tell the story. Most importantly they demonstrate how your advice is right for the client.
   2. A recent case contained a fact-find which recorded the client’s heath as good. When we fed back to the firm our rating of unsuitable, the firm challenged this. Why?
   3. From reviewing the file we could see the client had a hereditary heart condition and was concerned as family members had died early.
   4. This was a main motivation for the client but was not recorded anywhere.
4. Think about different fact-finds for different clients or different types of advice.
   1. Make sure you are asking the appropriate questions and recording sufficient detail. For certain types of advice, more detailed information on expenditure will be necessary.
   2. For example, advice on drawing an income in retirement is likely to need more detailed information than for a client in their 30s wanting to switch ISAs.
   3. That detailed information should demonstrate that you have considered essential and non-essential spending, and how this might change in the future.
5. Consider recording client interactions.
   1. This isn’t a requirement, but we have come across many firms who have invested in this. New and innovative technology means this is not a prohibitively expensive option. Recordings provide the most robust evidence available for a firm to make its case in the event of a complaint. Even if you aren’t recording the meeting, your client’s voice should still come through the fact-find loud and clear.
   2. Consider using the client’s own language and phrase. When we looked at the advice given to British Steel scheme members in 2017, this was very evident. The files where the client’s genuine feelings were recorded in their own words often resulted in better quality advice. This is because the adviser could understand and empathise with the client and tailor the advice to the individual client. Under challenge, or scrutiny, it helped explain the context in which the advice was given, and provided insight into what the client really wanted and needed.
6. Be brave. Challenge clients. Offer alternatives.
   1. It’s not your role just to follow client orders. Clients may have misunderstandings or misconceptions. Advisers should challenge these misconceptions and correct the client if there are misunderstandings. For example, many clients will have little understanding of longevity or the effects of inflation. The client may have based their initial decisions on false assumptions.
   2. The workings and role of the Pension Protection Fund (PPF) are a mystery to most clients, and we have seen the PPF presented as an option to avoid at all costs. But this is not a fair reflection of the significant value it provides to many people. Challenging misconceptions and client education is core to good advice. It is valuable. You are the experts. You will always know more than your client. And we expect your expertise to support your clients in this way. It is what we expect of the services you are paid to provide.

So that summarises some of the do’s based on the practice we have observed.

What about the don’ts? Here are my top 7 tips on what not to do.

1. Don’t provide templated objectives for the client to tick. Each fact-find should be as individual as the client.
2. Don’t use shortcuts and assumptions. The information you use should be up to date and accurate – for example, calling the scheme trustees to clarify the early retirement factors, or waiting a few more weeks for a state pension forecast.
3. Don’t approach this with bias. Think about the language you use and the way things are presented to the client.
   1. We have seen a number of instances of bias, especially in DB transfers. In one case, we saw an adviser paint a picture that DB pensions are old fashioned and restrictive as the client has no freedom or control and that utilising the pension freedoms is nothing but positive.
   2. Let me be clear. Our view is that the starting presumption for financial advisers should be that transferring out of a DB pension is unlikely to be in the consumer’s best interests. So consider the way you present information and whether this could be influencing the client to take a certain course of action rather than giving them what they need to make an informed decision.
4. Don’t see fact finding as just a regulatory requirement. It is essential to demonstrating suitability and the best way to demonstrate you fully understand your client. It also provides you with cover for your recommendations and advice.
5. Don’t rely on the same fact-find you have used for years. Times change and your fact finding should change with it.
6. Don’t rely on ‘I just know my client’ as a reason not to record key information. One of the most effective safeguards in the event of a file review/complaint is a robust file. This is a file which captures all the client information and can clearly demonstrate why the recommendation meets the client’s needs and objectives.
7. Most importantly, don’t give advice if the client is unable/unwilling to give you all the information you need. If this information is missing, you will struggle to demonstrate and evidence that your advice is suitable. And that is a regulatory requirement!

Matching your recommendation to a client’s attitude to risk

I’ve offered some top tips on fact finding and recording. Now let me turn to what we’ve learned about evidencing that your recommendation is aligned to the client’s attitude to risk.

1. Your client’s ‘voice’ should still come through the fact find loud and clear.
2. One of the main causes of unsuitable advice is where the risk level of the recommended solution does not match the risk the client is willing or able to take.
   1. We still see advice where the proposed solution is not aligned with the client’s attitude to risk.
   2. If you’re dealing with a client considering a DB transfer, we expect you to consider investment risk. This can sometimes be a slight discrepancy in asset allocation. But we also see files where cautious investors are put into unregulated and non-mainstream investments.
3. We expect to see an alignment between the client’s attitude to risk and your recommendation, including an assessment of how prepared they are to give up a guaranteed lifetime income for one which comes with no guarantees about value or sustainability. Make your records clear.
   1. For a client considering a DB transfer you will be also be assessing their attitude to transfer risk.
   2. We consider this assessment should be binary: yes, they have the attitude to accept the risk of transfer, or no they don’t.
   3. We don’t think the client’s attitude to transfer risk can be measured in percentage terms or using a scale such as cautious, balanced or adventurous.
4. Consider the limitations of the tools you use and the outputs they give.
   1. Third-party providers are increasingly providing risk profile questionnaires, cashflow modelling tools, model portfolios and asset allocation tools for advisers.
   2. It’s important that there is due diligence undertaken to understand the limitations of these tools. And to make sure all the inputs and outputs are aligned. There’s a real risk of miscalibration without such due diligence.

Evidencing the client’s attitude to risk should include separate assessments of all relevant factors, before they are combined to given an overall attitude to risk:

1. Attitude to risk – the client’s emotive response to risk. How do they feel?
2. Capacity for loss – the client’s ability to take risk. Can they afford it?
3. Risk need – do they need to take a risk to meet certain objectives? And should they?
4. clients’ risk tolerance and ability to bear losses – We have seen some comments in the trade press about whether capacity for loss is a valid metric to use. Our suitability rules require firms to consider clients’ risk tolerance and ability to bear losses. So we would expect to see this in every file. For example:
   1. We have seen evidence that a client is heavily reliant on a product or investment to meet their income throughout retirement, and cannot afford to lose any value. But this was not evidenced as the clear driver for the recommended solution.
   2. 2 clients may have the same benefits from a DB scheme but very different financial circumstances. The client who has significant other assets has a higher capacity for loss. This is because the income from the scheme is one of many sources of income. The other client has no other assets and the DB scheme is their main source of income in retirement. Their capacity for loss would be very low. Capacity for loss in each case would be evidenced and assessed differently, even though the clients present as similar.
5. Aim for consistency. We would expect to see a clear link between the information given to the client such as asset allocation and the recommended funds/portfolio.
   1. For example, where a firm sets out the type and proportional split of assets someone would be investing in, we expect to see a recommendation in line with that risk score. But we are seeing evidence that it is not.
6. Consider the client’s knowledge and experience. This may sound obvious, but it demonstrates understanding. Remember, the client should be able to understand the nature of the risks that they are signing up to and for DB transfers, the benefits of what they might be giving up. Consider how to do this bearing in mind the client’s knowledge and experience.
   1. For example, descriptions with financial jargon may be inappropriate for those with less knowledge and experience. Diagrams, graphs, etc showing ‘what if’ scenarios could be more effective.
7. Make sure the scenarios that you use are realistic and effective. It is hard to assess if the risk profile is suitable if all the scenarios shown are positive. It is much more effective to stress test people’s reactions to a negative scenario.

And finally, it’s not just clients’ knowledge and experience. It’s yours too. Acknowledge and recognise the limitations of your own knowledge. Do you really understand the products and services you may be recommending? We would expect to see evidence of the due diligence carried out on products and services to mitigate this.

Improving the suitability of financial advice [Speeches Published: 19/09/2019 Last updated: 19/09/2019]

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