When do You Need a Suitability Report?

17th December 2020 Adam George

It's surprisingly common for us at PowerPlanner to be asked "do I need a suitability report for this case?" by financial advisers. I say it's surprising because, originally, my understanding was that financial planning practices must have processes in place to decide these kinds of things for themselves. However, despite the fact that many do, the requirements surrounding SR necessity are often more nuanced.

For instance, you could have a client who is looking to increase personal pension contributions in light of a recent pay rise, or maybe someone who wishes to delay retirement by a year. These may only seem like minor changes involving very little substantial advice, so would a full-on suitability report be overkill?

What Does the FCA Say?

The regulator's online handbook, COBS, is always a handy resource. COBS 9.4 is the section that talks about suitability report necessity:

9.4.1 A firm must provide a suitability report to a retail client if the firm makes a personal recommendation to the client and the client:

  1. acquires a holding in, or sells all or part of a holding in:
    1. a regulated collective investment scheme;
    2. an investment trust where the relevant shares have been or are to be acquired through an investment trust savings scheme;
    3. an investment trust where the relevant shares are to be held within an ISA which has been promoted as the means for investing in one or more specific investment trusts; or
  2. buys, sells, surrenders, converts or cancels rights under, or suspends contributions to, a personal pension scheme or a stakeholder pension scheme; or
  3. elects to make income withdrawals, an uncrystallised funds pension lump sum payment or purchase a short-term annuity; or
  4. enters into a pension opt-out.

9.4.2 If a firm makes a personal recommendation in relation to a life policy, it must provide the client with a suitability report.

The phrase "personal recommendation" here essentially means advice that is personal to a particular client, as opposed to generic advice to be consumed by the public.

From the above, it'd be reasonable to conclude that you're better off getting an SR written in any case where a personal pension or investment plan is involved. However, COBS 9.4.3 goes on to say:

9.4.3 The obligation to provide a suitability report does not apply:

  1. if the personal recommendation is to increase a regular premium to an existing contract;
  2. if the personal recommendation is to invest additional single premiums or single contributions to an existing packaged product to which a single premium or single contribution has previously been paid.

So, in the case of the aforementioned client scenarios, a suitability report wouldn't be required. If, however, there was further advice relating to the existing plan (e.g., a fund switch) then a report would be needed to explain the changes being made to the client's investments.

Is it Always as Clear Cut as That?

No, it isn't.

One notable thing about COBS is that it assumes no existing adviser-client relationship. The guidelines are the same regardless of whether a client is an experienced investor or opening his/her first ever savings product. This is actually quite convenient, as it allows you to exercise your discretion, which is where financial advisers truly add value.

Of course, your report has to be compliant, but that doesn't mean it needs to be complicated. The requirements for content are spelled out in COBS 9.4.7, which simply says that:

9.4.7 The suitability report must, at least:

  1. specify, on the basis of the information obtained from the client, the client's demands and needs;
  2. explain why the firm has concluded that the recommended transaction is suitable for the client having regard to the information provided by the client;
  3. explain any possible disadvantages of the transaction for the client; and
  4. in the case of a life policy, include a personalised recommendation explaining why a particular life policy would best meet the client’s demands and needs.

There's a bit more to it in certain cases, of course. However, the essence is that you reiterate your understanding of the client's objectives, detail your recommendation and its relevance to these objectives, and ensure you're clear about any risks involved.

As such, if you already have an ongoing relationship with the client and the objectives aren't changing, you don't need to go into autobiographical levels of detail to be compliant. A summary of the pertinent objectives and how the changes you're recommending relate to these will be sufficient. You can even reference a previous suitability report if it's recent enough and still relevant.

It's also worth noting that the FCA have set out their guidelines regarding "abridged advice" to enable firms to give a short form of recommendation report if the advice is especially simple, such as to remain in a workplace pension or take benefits from an existing final salary scheme.

So Do You Need Different SR Formats Depending on the Advice?

Different content, yes, but whether you adopt an entirely different format is up to you.

The FCA are seldom prescriptive, so if you want to, say, use a full report for new business or pension transfers but have shortened letters for annual reviews or abridged advice then that's a valid approach, as long as you adhere to the compliance requirements.

At PowerPlanner, we support multiple report templates or letter styles depending on our customers' preferences, although we generally favour a suitability report for all occasions so that the client has a single, comprehensive document that's always up-to-date with their latest aims and objectives. This is particularly apt after the year we've endured, as the priorities & needs that many people had but a year ago may look very different now.

Furthermore, even in cases where you're not obliged to issue a suitability report, I always think some form of documented advice is worthwhile to demonstrate a good standard of professionalism and service.

Whatever your suitability report preferences are, we take pride in the fact that having full control of our systems means we can stay on top of COBS rulings and the regulator's policy statements. System changes propagate through to all advisers with whom we work, which is just one way that we help our customers remain compliant.

Contact Us about Your Suitability Report Requirements Today

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