Suitability of investments

We don’t get many complaints anymore about sales before 29 April 1988 – also called 'A Day' – when there weren’t any regulatory requirements for investments.

However, legal standards did apply. These meant that if a business made a recommendation, it had to advise with reasonable care and skill.

There were several regulators in this period.

Businesses were required to find out the customer’s circumstances and needs before making a recommendation and provide the ‘best advice’.

They were then only allowed to recommend suitable investments.

The Financial Services Authority (FSA) became the regulator on 1 December 2001 and the Financial Conduct Authority (FCA) took over on 1 April 2013.

However, since 2001, the rules have consistently required businesses to ‘know your customer’. The rules state that to recommend a suitable investment or investments, you must gather enough information about a client’s:

• knowledge and experience
• financial situation, and
• investment objectives

You'll find the current rules on assessing suitability in the FCA Handbook COBS 9A.

You may also find it useful to look at the guidance on the scope of the UK provisions which implemented the Markets in Financial Instruments Directive (MiFID) II, which came into effect in 2018.

We’ll look at your customer’s circumstances at the time that you advised them. If their circumstances have changed since then, we’ll only consider the change relevant to our investigation if you could have reasonably foreseen it at the time. We look at things like:

• age
• job
• personal and financial circumstances
• level of debt
• financial requirements and objectives
• attitude to risk
• capacity to bear loss
• the amount invested

Sometimes parties can’t agree what the customer’s circumstances were or the business tells us its records are incomplete or unavailable. In these situations, we assess the evidence we have to reconstruct the customer's likely circumstances at the time of the sale.

We’ll use this, as well as information about the recommended investment product, to decide whether your advice was suitable.

We may uphold a complaint if an adviser didn’t consider the features of the investment with due skill and care, and so recommended an unsuitable product.

Investment providers label their products differently, so we never take descriptions at face value. We examine:

• the terms and conditions
• the product’s flexibility
• the risks, including asset allocation and structural risks
• the duration of the investment – ‘the term’
• the expected return
• the charges your business applied

It may be that more than one investment was suitable for the customer. But we rarely uphold a complaint simply because there could have been other suitable recommendations.

Financial businesses must record information when they make a personal recommendation about an investment, for example, what the customer told you about their attitude to risk. This will help our investigation.

When we assess a complaint, we give more weight to written attitude-to-risk statements if they are:

• completed at the time of the sale
• clear and unambiguous
• expressed in terms that the customer was likely to understand
• signed by the customer, although this isn’t a deciding factor

Businesses use different descriptions to describe their customers’ attitude to risk, and these vary considerably. So we’re very careful when cases include broad descriptions, such as 'low risk'.

In some cases, the customer's actual attitude to risk may have been different to the one you've recorded. For example, it’s difficult to square a recorded attitude to risk of 'adventurous' with modest financial means, little investment experience and the need for a stable future income.

In these cases, we’ll want to consider:

• the customer’s understanding of the investment product
• what your adviser told them
• how your adviser explained the attitude-to-risk scale

We’re unlikely to decide the customer had a different attitude to risk from the recorded one, if:

• there’s a clear record from the time they took out the product, that includes why the investment risk was suited to the customer, and
• we’re satisfied you explained everything clearly

Transparency isn’t the same as suitability.

You may have given customers product literature that explained the features and risks of an investment, but you’re still responsible if the product was unsuitable. Customers are entitled to rely on the advice they receive.

But clear personalised documents – such as a ‘suitability’ report or ‘reasons why’ letter – might suggest the customer was prepared to take the risks associated with the investment. This could be evidence that you explained the risks clearly in a way the customer could understand.

If the customer was investing a significant sum, we’ll ask whether your business considered diversification. We’ll assess whether the amount is significant, according to:

• the customer’s circumstances and objectives
• the amount invested
• whether the customer had other investments or savings

If your firm manages a customer's portfolio on a discretionary basis, suitability obligations apply.

In these cases, we look at the mandate that was agreed for the portfolio, as well as the way the portfolio has been invested over time.

It may be that an adviser was responsible for gathering information about the customer and their circumstances, and recommending a suitable mandate. And a separate firm was then responsible for managing the portfolio in line with that mandate. If so, we’ll want to understand:

• the relationships between all the parties
• which parts of the customer journey – and which of the suitability steps – each firm has agreed to be responsible for, and
• what each party has told the customer about it