It’s not surprising that there’s a lot of confusion about suitability reports. Once you know where to look in the FCA Handbook, the FCA’s requirements for suitability reports are, in reality, relatively concise. Yet over time, reports have grown far longer and more complex – less as a result of direct regulatory demand, and more through layers of industry interpretation and a collective desire to ‘play it safe’. Throw in the influence of Financial Ombudsman Service decisions and their implications for suitability reports, and things start to feel quite complicated.
This can lead to 60-page suitability reports, including everything from the client’s personal circumstances, to critical yield information, to output from your pension switch comparison software of choice.
On the surface, this approach might feel like it’s reducing the risk of being called out by the FCA or a file checker – but in reality, it can leave the client swamped by information and unsure of what they’re actually agreeing to. It also means that the paraplanner’s focus is split across so many areas that the really crucial bits – the parts the FCA say must be included in a suitability report – don’t receive the attention they deserve, and can be treated as an afterthought rather than one of the main building blocks of a good suitability report.
This blog gets back to basics, with a focus on what definitely needs to be included in a suitability report. These are the areas that can make or break a good (and FCA compliant) suitability report.
Suitability Report Essentials – According to the FCA
In COBS 9.4, the FCA states that a suitability report must:
- Confirm the client’s demands and needs (i.e. their objectives)
- Explain why the recommendation is suitable for the client
- Explain any possible disadvantages of the recommendation
This has been extended slightly for MiFID business in COBS 9A.3.3, but mainly covers the points above. It also adds that the suitability report must:
- Include information on whether the recommendation is likely to require the client to seek a regular review
COBS9A.3.4 then goes on to remind us to ensure that the report is ‘clear, fair and not misleading’.
For pension recommendations, there are two other points to consider: stakeholder pensions and workplace pensions.
This can be quite hard to believe when you’re used to working with very long suitability reports, but that is a summary of what the FCA rules say must be in a suitability report. I believe that much of the extra material that has become standard in many suitability reports has come from the ‘assessing suitability’ section of COBS, which covers the research needed on file – but not necessarily in the report.
Assessing Suitability
This is covered by COBS 9.2 and COBS9A.2, and for most firms with a robust fact finding and information gathering process, this section should be covered by your files – so there is no need to put this information in the report. A part that’s worth looking at more closely in the context of suitability reports is the guidance on replacement business (covered by COBS 9A.2.18 & COBS 9A.2.18A).
This section covers the FCA’s guidance on the comparisons that need to be done when recommending a client switches to a new provider. This is for the file and does not necessarily need to go into the suitability report unless it helps the client understand something, helps explain why the recommendation meets their objectives, or is linked to a disadvantage.
The FCA leaves it to you to decide which comparisons you actually do, and they don’t say it needs to go into the report. Their guidance states that “a firm must collect the necessary information on the client’s existing investments and the recommended new investments and undertake an analysis of the costs and benefits of the switch, such that they are reasonably able to demonstrate that the benefits of switching are greater than the costs.” Notably, this doesn’t just mean a numerical comparison of charges – it includes other non-numerical costs or benefits that might be relevant to the client, such as the flexibility on offer, the investments available, or other ways the plan might help the client achieve their objectives.
Consumer Duty
The existing ‘clear, fair and not misleading’ guidance was taken to another level by Consumer Duty, with its ‘Consumer Understanding’ outcome, and is detailed in ‘PRIN 2A.5 Consumer Duty: retail customer outcome on consumer understanding’. This part of the Handbook states that you must “provide relevant information with an appropriate level of detail, to avoid providing too much information such that it may prevent retail customers from making effective decisions.”
Take a critical look at your suitability report templates and whether they’re helping clients make informed decisions. If you’ve got feedback from clients that they don’t read them, this is a red flag that they could be too long or difficult to understand.
This is also echoed by the way the FOS assess complaints. Lack of client understanding or things not being clear are common themes.
Conclusion
Ultimately, a good suitability report is about clearly explaining to the client what you are recommending, why it meets their objectives, and what the potential downsides are.
There will always be a place for detailed analysis, comparisons and supporting evidence – but much of this belongs on file, not in front of the client. By focusing on what the FCA actually requires, and using judgement about what genuinely helps the client understand the recommendation, firms can produce reports that are both compliant and meaningful.
In many cases, less really can be more.
