1. KYC, FCA & FOS
Know Your Customer etc
For adviser use only. This information has not been approved for use with customers.

2. Know your customer & Suitability
COBS 9.2 & COBS 9.4

3. Learning outcomes
Review the requirements of COBS which is ‘Know Your Customer’
Review the requirements of COBS 9.4 which is Suitability reports
Review the key findings of FCA TR15/12 (Suitability of investment portfolios)
Reflect looking at FOS outcomes and where it may have gone wrong
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4. Know your customer
(1) A firm must obtain from the client such information as is necessary for the firm to understand the essential facts about him and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing:
(a) meets his investment objectives;
(b) is such that he is able financially to bear any related investment risks consistent with his investment objectives; and
(c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.
(2) The information regarding the investment objectives of a client must include, where relevant, information on the length of time for which he wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment.
(3) The information regarding the financial situation of a client must include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments.
No need to read
This is just to show what is in FCA guidance
We will explore in more detail
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5. He went quiet on being shown this
One adviser said to FCA that there has not been any guidance on Suitability
This is from June 2007
He went quiet on being shown this
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6. Updated as recently as January 2016
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7. Assessing attitude to risk
‘Hard’ facts: ‘Soft’ facts: Unconscious bias Analysis: Investment options:
Financial assessment of income make sure you have evidenced the essential spending make sure you get expenditure analysis nail the objectives what is it you want to achieve
financial resources (assets, income versus expenditure, long- and short-term commitments, emergency fund, existing debt, other investments and savings, protection and pension arrangements)
age of customer and any partner or dependants (now and in the future)
tax status (likely to change, inheritance-tax liability, for example)
objectives (purpose of investment: amount sought, income or capital growth, investment timescale, accessibility)
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8. Assessing attitude to risk
‘Soft’ facts: Unconscious bias Anchoring Loss aversion Sunk cost fallacy
Financial assessment of income make sure you have evidenced the essential spending make sure you get expenditure analysis nail the objectives what is it you want to achieve
financial resources (assets, income versus expenditure, long- and short-term commitments, emergency fund, existing debt, other investments and savings, protection and pension arrangements)
age of customer and any partner or dependants (now and in the future)
tax status (likely to change, inheritance-tax liability, for example)
objectives (purpose of investment: amount sought, income or capital growth, investment timescale, accessibility)
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9. the client’s knowledge and experience of investment
Rory Percival, technical specialist, FCA
‘three areas
of potential concern’
risk descriptions
capacity for loss
the client’s knowledge and experience of investment
FCA have told us areas of concern
- So these very clearly need to be well covered on your files
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10. Assessing suitability – FG11/05
‘the risk a customer is willing and able to take’ …firms are meeting the requirements… …are they regularly challenging…
Willing is the attitude and able is the capacity – ability is for the adviser to tell the client we need to see if the money is essential then capacity is zero
We reviewed the causes relating to suitability assessment failings from files previously reviewed by
the FSA between March 2008 and September Of the 366 cases that we judged to have failed our
suitability requirements, 199 cases did so because the investment selection did not meet the customer’s
‘attitude to risk’.7
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11. many failed to take account of capacity for loss
investment files assessed
199 failed
to meet customer’s
attitude to risk
366 failed suitability
many failed to take account of capacity for loss
Another clear indication
Firms here are meeting these requirements - but regularly challenging what you do ensures you continue to deliver right outcomes
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12. Suitability reports
These are an area that has received lots of attention from FCA – and have also been picked up again by FAMR.
Clarity is key
As is tailoring to individual
Less can be more
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13. Suitability reports
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:
(a) a regulated collective investment scheme;
(b) an investment trust where the relevant shares have been or are to be acquired through an investment trust savings scheme;
(c) 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 or purchase a short-term annuity; or
(4) enters into a pension transfer, pension conversion or pension opt-out.
No need to read now
This is just shows FCA rules
We’ll look into what it means for you now
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14. Factsheet illustrates good practice Let’s look more closely
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15. Suitability reports
Think about the way you explain your recommendations to customers. Consider these points when you are writing your suitability report: Objectives parameters and risks how the recommendation meets the goal
This is the executive summary
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16. Suitability reports – good practice
Customers are less likely to consider your recommendations if your report is too long, so:
keep it as short as you can (this depends on how complex you’re advice and the circumstances are)
use bulleted lists rather than long sentences
put technical information in an appendix
Give a clear summary of the following to show you have taken them into account:
Objectives, needs, priorities, relevant existing investments
Some emphasis on last line
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17. Suitability reports – good practice
You may also want to:
use bold text to highlight important risks and changes associated with the recommendations
use the client's own words to make your recommendations more relevant, possibly taken from your file notes
send the report to your client before your second meeting so you can discuss it fully at that meeting
Clients own words COWs – memorable and very valuable
Ged – Special constable- massive value of notebook- as in Criminal Court
Same principle
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18. …said that what the regulator was looking for was suitability reports that were “short and more concise” compared to many it had seen but “first and foremost, the client should be able to read and understand the report. As a sector that’s not generally where we are at the moment. Reports are more often concerned with covering the firm’s position.”
FCA want shorter..
Rory Percival
FCA Technical Specialist
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19. “The report doesn’t have to be the length of ‘War and Peace’ – the consumer won’t read it if it is – but it needs to explain why that particular product is right for that particular consumer at that particular time. “Risk warnings are most effective when they are directed at that consumer in terms of the investment being considered, rather than being lost in some small print.”
FOS agree with FCA …
Caroline Mitchell, lead ombudsman at the Financial Ombudsman Service
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20. Thematic review TR15/12
Touch on this as relevant – covered by Ricky and Mark
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21. Thematic review TR15/12
a number of firms have taken steps to both improve and demonstrate the suitability of customer investment portfolios
many firms still have to make substantial improvements in gathering, recording and regularly updating customer information to support the investment portfolios they manage for customers
firms need to do more to ensure that the composition of the portfolios they manage truly reflects the investment needs and risk appetite of their customers, especially those who have a limited capacity for, or desire to expose themselves to the risk of, capital loss
firms need to ensure that their governance, monitoring and assessment arrangements are sufficient to meet their regulatory responsibilities in relation to suitability
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22. Thematic review TR15/12
We expect firms to take note of our findings and ensure that they are able to demonstrate how the portfolios they manage are suitable.
Firms need to embed practices that ensure that they are consistently reviewing and continuing to meet their customers’ needs where they have agreed to provide an ongoing service…
The results of our 150 customer file reviews across all firms are:
34 (23%) indicate a high risk of unsuitability
55 (37%) are unclear and
61 (41%) show a low risk of unsuitability
101% due to rounding
Look how many are unclear
& 23% +37% does not look great
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23. Decisions, decisions FOS decisions might be valuable pointers
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24. Decisions, decisions
Random sample (12 FOS decisions) taken to October 2015 Search term ‘investments’ 6 had claims management company representation, 6 had none CMC 1/6 cases upheld by ombudsman No CMC 5/6 cases upheld by ombudsman
Numbers who have used cmc’s – but it has not helped their cause
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25. Quote from FCA on cmcs
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26. Decisions, decisions Sample 1st November 2015 to 4th January 2016
Search term ‘attitude to risk’, outcome - upheld
93 cases
Search term ‘capacity for loss’, outcome upheld
176 cases
Search term ‘suitability’, outcome upheld
54 cases
Where all terms searched for total 229 cases
Recent period but can include some long historic cases
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27. Attitude to risk
I accept that Miss M confirmed that her attitude to investment was ‘medium’ (‘3’ on a scale of 1 to 5) and that a ‘medium’ attitude to risk is clearly defined… …and £7,000 in a technology fund of a stocks and shares ISA.
(Build…)
Guess what she was advised to invest in ?
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28. Capacity for loss
…Mrs E’s age, who has a cautious attitude to risk and very limited capacity for loss. But I don’t agree that the ‘cautious’ approach to risk means that other low risk fund choices wouldn’t be more suitable for a 22 year investment period, and still in line with her attitude to risk (at least, for the first years of that period).
Time period crucial
As highlighted under suitability earlier
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29. Suitability
At the time the advice was given in March 2002, Mrs D was recently widowed. She was looking to maximise the returns on her existing investments. Mrs D had been advised to invest £100,000 and £80,000 in two with-profits bonds only a month before. The business recommended these should be used as security for a loan of £95,964 as part of a GTEP arrangement. It also recommended Mrs D borrow a further £273,322 so as to purchase more traded endowment policies.
Geared Traded Endowment plans !
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30. Contemporaneous
Because an advisor receives commission from his advice does not mean that it is given purely out of self interest. I cannot say what was said when the advisor and Mrs F met, but considering both what the CMC says happened and the contemporaneous records I cannot be satisfied that the advice given was inappropriate.
Another massive emphasis for value of contemporaneous notes- stopped them from upholding complaint
Bad to police notebook
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31. Do we need to do things differently?
Probably not
But can we do things better
Important to keep challenging
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32. Learning outcomes
Review the requirements of COBS which is ‘Know Your Customer’
Review the requirements of COBS 9.4 which is Suitability reports
Review the key findings of FCA TR15/12 (Suitability of investment portfolios)
Reflect looking at FOS outcomes and where it may have gone wrong
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38. Important Information
This information has not been approved for use with customers and is based on Aviva’s interpretation of current law and legislation, and our understanding of HM Revenue & Customs (HMRC) practice as at 31 December It is provided for general information purposes only and should not be relied upon in place of legal or other professional advice. Both the law and HMRC practice will change from time to time and our interpretation may be subject to challenge by HMRC or other regulatory body. Aviva cannot act as legal adviser for you or your clients. You should always seek appropriate legal or other professional advice.
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