FCA: “any personal recommendation which is given to a client through a streamlined advice service must nevertheless be suitable” Posted 18-04-2017



The FCA’s consultation paper regarding streamlined advice came out last week (https://www.fca.org.uk/publication/guidance-consultation/gc17-04.pdf)

 

The key takeways from the 51 pages are:

Section 2.6
“MiFID II contains obligations which require a product distributor to

  • understand the financial instruments it offers, recommends or sells;
  • assess the compatibility of the financial instruments with the needs of the clients to whom it provides investment services….and how they fit in with the end clients’ needs and risk appetite.”

Section 2.18
“Some financial products are also unlikely to be appropriate for a streamlined advice process because of the amount of information likely to be needed by the firm in order to make a suitable personal recommendation to a retail client. In general we would expect that the more complex, highly concentrated or illiquid the product, the more likely it is that firms will need more information about the client’s broader portfolio in order to meet the firm’s suitability obligations.”

Section 2.41
“The suitability assessment is a firm’s responsibility and a firm should avoid indicating to the client that a certain financial instrument is the one that the client chose as being suitable, or requiring the client to confirm that an instrument or service is suitable.”

Section 2.45
“We would remind firms that they are responsible for ensuring that their personal recommendations are suitable.”

Section 4.20
“if a firm expressed its opinion of the importance or merits of the features of a product, this would be likely to amount to giving regulated advice”

Section 4.24

  • “If any information is given that would amount to an opinion by the firm providing the service – for example, on the likelihood of risks or any hierarchy of how important different risk considerations might be, this is likely to be regulated advice. “
  • “any personal recommendation which is given to a client through a streamlined advice service must nevertheless be suitable”
  • “In general we would expect that the more complex, highly concentrated or illiquid the product, the more likely it is that firms will need more information about the client’s broader portfolio in order to meet the firm’s suitability obligations”

 

Our assessment of these key points are:

Section 2.6:

  • The responsibility to understand the financial instruments is firmly placed on the product distributor (the adviser).
  • Additionally, the compatibility of the financial products recommended is not limited to a risk profile match – it includes the “needs of the clients” e.g. drawdown. This remains an advisers’ responsibility – regardless of whether the advice is streamlined or not.
  • When a DFM is a product distributor (by MiFID II’s definition), the products they distribute need to be as compatible with the end clients’ needs as they are with the end clients’ risk profiles.

Section 2.18:

If streamlined advice is to exclude products that use leverage, lack diversification and/or carry high levels of liquidity risk, should all property funds, smart beta and conviction funds be excluded? Probably not. It is more likely that advisers need to understand the levels of leverage, concentration, liquidity etc in the products they recommend.

Section 2.41:

This is consistent with past FCA publications – FCA SYSC 8.1.6R, CP12/09, TR15/12 and TR16/01 – removing any ambiguity about who is responsible for ensuring that the end clients’ needs and risks are compatible with the financial instruments recommended.

Section 2.45:

  • When technology solutions are used to profile a client and pick a portfolio (DFM/MPS provided or CIP constructed), the adviser remains responsible for suitability.
  • Suitability assessment is not one sided i.e. it does not begin and end with risk profiling of the client. It includes risk profiling the financial instruments too.
  • Suitability includes risk assessing the financial instruments and matching the client risk (and needs) to the product risks and features.

Sections 4.20 and 4.24:

  • Providing generic information on risk produced by a third party does not require advisers to be regulated. So, if advisers do not express an opinion, they do not need to be regulated.
  • If unregulated advice lacks opinion, then the flip side is that regulated advice should include an opinion – on the importance and/or merits of the features of the recommended (or unrecommended) products including opinions on the likelihood of risks.

 

In summary

  • Unregulated advice can lack opinion, whereas opinion is expected in regulated advice.
  • Regulated advisers are responsible for suitability – whether the financial products are selected through automated processes and/or a third party.
  • Suitability is not limited to risk matching – it includes needs matching.
  • Suitability is two sided i.e. it involves assessing both the client and the financial instruments.
  • Suitability matching is not possible unless both the client’s risks and needs and the financial products’ risks and features are well understood.
  • Advisers should understand the features of the products they recommend e.g. the products’ liquidity, leverage and diversification.

AssetQ delivers exactly what advisers need – the means to swiftly understand the features of the products they recommend so that clients’ needs and risks are matched in a consistent, audited and FCA compliant manner.


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