Assessing the suitability of investments

When investigating whether an investment was suitably recommended to a customer, we look at things like:

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

We consider the advice based on the customer’s circumstances at the time you gave it. If their circumstances have changed since then, we’ll regard the change as relevant to our assessment only if you could have reasonably foreseen the change at the time.

If there is a dispute about a customer's circumstances, we’ll decide what circumstances were most likely, based on the available evidence.

If your records are incomplete or unavailable, we may reconstruct the customer's circumstances at the time of the sale from the evidence available. We’ll use this evidence, as well as information about the recommended investment product, in deciding whether your advice was suitable.

When considering whether an investment was suitable for a customer, we’ll look at the features of the recommended product. The features we’ll look at include:

• the terms and conditions
• its flexibility
• the risks, including asset allocation and structural risks
• the duration of the investment (the term)
• the expected return
• the charges applied by your business

Investment product providers label their investment products in various ways. We don’t take descriptions at face value.

But we may uphold a complaint if the adviser has recommended an unsuitable product. This is because they would have failed to act with due skill and care when considering the features of the investment.

Sometimes more than one investment may have been suitable for the customer. But we don’t usually uphold a complaint just because there could have been other suitable recommendations.

When looking at complaints about the sale of investments, we take into account the regulatory and legal standards that applied when the recommendation was made, making sure we don’t use hindsight.

Recommendations made before 29 April 1988

There weren’t any regulatory requirements, but legal standards still applied. If a business made a recommendation, it had to advise with reasonable care and skill.

Complaints about sales made before 29 April 1988 (also called A Day) aren’t common now. The majority of those complaints were about sales of mortgage endowment policies.

The same legal standards continued to apply to recommendations made after 29 April 1988. But because the regulations in place since then have created responsibilities that are at least as demanding as those standards, we usually only refer to the regulatory requirements when looking at recommendations made after 29 April 1988.

Recommendations made between 29 April 1988 and 30 November 2001

There were a number of regulators during this period but the regulatory requirements were broadly the same. Businesses had to provide “best advice”, meaning they had to find out the consumer’s circumstances and needs before making a recommendation, and recommend only suitable investments. 

From 1 December 2001

The Financial Services Authority (FSA) became the regulator on 1 December 2001 and the Financial Conduct Authority (FCA) took over on 1 April 2013. The rules have broadly continued the requirements for businesses to “know your customer” and to recommend suitable investments.

The regulatory requirements at the time of advice can sometimes bear directly on the outcome of a suitability complaint; but the issues we consider are largely common to all the sets of rules issued since 1988.

Financial businesses must record information at the time of making the personal recommendation about an investment. This information helps us in an investigation.

An example of this information is what the customer told you about their attitude to risk.

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 – but this isn’t a deciding factor

The descriptions that businesses use to describe their customers’ attitude to risk vary significantly. So we’re very careful when considering cases that involve broad descriptions, for example, “low risk”.

In some cases, the customer's actual attitude to risk at the time may have been different to the attitude recorded. For example, if the customer had modest financial means, little investment experience and a need for stable income in future, it’s difficult to square that with a recorded attitude to risk of “adventurous”.

In cases like these, we’ll consider:

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

But if there’s a clear record from the time, including the reasons why the investment risk was suited to the customer, and we’re satisfied that you explained everything clearly, it’s unlikely we’d decide the customer had a different attitude to risk from the recorded one.

Transparency isn’t the same as suitability. Providing customers with product literature explaining the features and risks of an investment doesn’t absolve you from responsibility if the product was unsuitable.

Customers are entitled to rely on the advice they receive. They can’t be expected to be very cautious about accepting personal recommendations given to them by an adviser.

But clear, personalised documents directed at the customer can be persuasive evidence that the personal recommendation was suitable.

For example, when investigating a complaint, a “suitability report” or “reasons why” letter might persuade us that the customer was prepared to take the risks associated with the investment. That’s because the risks were clearly explained in terms the customer could understand.

If the customer was investing a significant amount, we’ll look at whether the business considered diversification (spreading the investment across a range of products or areas) when we consider whether the recommendation was suitable. Whether the amount is significant is likely to depend on: 

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