What next for suitability and DB transfers

The FCA’s guidance consultation on defined benefit (DB) transfers included new guidance on suitability.

While the guidance isn't expected to come into force until early next year, much of what it says should already be treated as best practice by advisers. It's also worth considering when dealing with other types of investment advice.

The guidance is clear that an adviser cannot provide suitable advice unless they have gathered all the necessary and relevant information they need about their client.

If anything is missing or just doesn’t make sense, then the adviser is not in a position to give suitable advice.
To demonstrate any advice given is suitable, an adviser must be able to show that it's in the client’s best interests taking into account both their needs and objectives.

This means the advice must be consistent with the client information held on file. If the details on file don't match the information used to provide advice then it's very likely the advice isn't suitable.

It's a crucial part of the information gathering process to resolve any inconsistencies in the information provided by the client, and within their needs and objectives. 

If these aren't resolved, then these inconsistencies can compromise the advice given. 
For example, if a client’s declared monthly income is much greater than their spending but they don't have any savings, then clearly something else going on.

This needs to be investigated before you can move on to making any recommendations.

Without this, can you really say that the client can afford to do what they're looking to do or, in a DB transfer case, is the lifestyle the client plans for retirement in any way realistic?

What to include in suitability reports

Advice is usually delivered through suitability reports which, in the new guidance, the FCA all but recommends are sent to clients as a draft before the final recommendation is made.

This allows the client to review the advice in their own time before talking it over with their adviser and making a final decision.

It also lets the adviser check the client’s understanding of what they’re being advised to do and, in the specific case of DB transfers, the risks of transferring.

Following these additional discussions, suitability reports can be finalised so that they deal with any concerns raised. It may be that the advice is changed if it becomes clear an adviser cannot show that the client understands the risks involved.

For DB transfers, suitability reports must include a recommendation to transfer or not to transfer, together with details of the client’s needs and objectives and the possible disadvantages of the recommendation.

From October, there must also be a one page summary of the recommendation inside the front cover containing key information such as:

• A statement as to whether it's abridged or full pension transfer advice;
• Details of ongoing advice services to be provided following the transfer;
• An outline of the risks involved with DB transfers, with an invitation for the client to sign the summary to confirm they fully understand the risks;
• Details of expected ongoing charges, plus a comparison of charges and revalued monthly income in the DB scheme and the charges in the client’s workplace pension; and
• Details of the initial advice charge in monetary terms and how many months it would take to cover the charge out of the revalued monthly DB pension income.

All suitability reports must set out a clear course of action.

If a report leaves options open to the client, it suggests the adviser doesn't have sufficient information and so isn't in a position to make a suitable recommendation.

Other things to think about 

The presentation of suitability reports needs to be personalised to the extent that the client can make an informed decision. 

This could be done using the client’s own words to describe their objectives or their reactions to different risks, or by making any risk warnings or details of loss of benefits specific to them.

Ideally, suitability reports need to:

• Be short enough for clients to want to read them;
• Be laid out carefully;
• Be written in plain English;
• Focus on key information so the client knows what's important;
• Include tables or charts from the pension transfer analysis in the body of the report rather than annexes; and
• Be made relevant to the client.

Tailoring it to the client involves giving plenty of detail about the client’s circumstances, and confirming the client’s objectives and needs and their importance.

It also means providing explanations of why the recommendation meets the client’s objectives and needs given their circumstances.

The report should contain detailed information on any trade-offs the client needs to make, and include only relevant risk warnings rather than a generic list.

Generally, it's worth taking care when copying and pasting information between reports for different clients.
Also, where suitability reports are over 25 pages long, then it may be a good idea to review them to make sure they say what you want them to say, and strip out any redundant information.

The main defence

There are no changes in the requirements for DB transfer advice when it comes to record keeping, and case files will continue to be kept indefinitely.

In maintaining your files, have a think about the minimum amount of information the files should contain to demonstrate the recommendation stacks up. As mentioned, files need to be explicit in showing how the advice fits in with the client’s objectives.

It's not only things like know your client information, risk assessments and suitability reports that need to be kept on file, but also any research and analysis carried out and thorough notes of client phone calls and meetings.

Where the case has been discussed with colleagues, then records of these conversations should also be kept.

In the end, keeping good records is one of the adviser’s main defences against future complaints.

The new DB transfer rules and guidance mean that advisers involved in this kind of advice need to be reviewing their processes anyway, so it could also be an ideal time to look at how your firms is assessing and demonstrating suitability.

Are you gathering all the necessary information and addressing any inconsistencies?

Is the suitability report readable and client-focused, and does it explain the recommendation clearly while outlining the risks?

And finally, are sufficient records kept that justify the recommendation if asked to produce these?