Assessing investment suitability

In March the Financial Services Authority (FSA) published finalised guidance in the form of a paper Assessing suitability: Establishing the risk that a customer is willing and able to take and making a suitable investment selection.

The paper was published as a direct result of the high number of unsuitable investment selections witnessed by the FSA.

Yesterday in London, the FSA together with the Financial Ombudsman Service (FOS) ran a well attended conference to engage with the retail financial services sector and challenge us all to think how we might continue to improve our systems and processes around the delivery of investment advice.

I particularly enjoyed two parts of the conference.

The first was a very simplistic but meaningful role play of a client receiving investment advice. What was abundantly clear is that it is almost impossible to deliver meaningful and suitable investment advice unless the adviser has a clear understanding of the client’s investment objectives.

The role play client was to say the least investment risk averse but the adviser (probably due to inadequate process) labelled him as a “balanced” investor and then offered up a multi asset class balanced managed fund with 60% equity content as a solution.

What this client really didn’t want was to suffer any capital loss, simply because he had a known cost at a known date.

He may well have been unhappy with the return he was getting on cash deposits and yet that seemed to be exactly the right kind of product for him.

I was surprised that I enjoyed the session from the lead ombudsman at the FOS, Caroline Mitchell.

My view historically is that the FOS is a bit of a law unto themselves and it was questionable if the people that they employed were suitably skilled and qualified. This session gave me a good deal of reassurance.

The FOS pretty much can be summed with their approach to looking at a complaint; “Is that particular product suitable for that particular consumer in these particular circumstances at that particular time.”

So we all need to consider how we might improve the delivery of investment advice even if we think our current systems and processes are robust.