He had a deferred pension benefit from a defined benefit scheme and had received recommendations to transfer the pension into a Qualifying Recognised Overseas Pension Scheme.
The recommended home for the transferred pension monies consisted of two well-known and perfectly respectable organisations with strong reputations in the offshore pensions’ market. The recommendations listed the attributes of these firms, which was fine, but there was an important omission.
I asked the prospective client: “I can see what is being recommended, but I cannot see why it is being recommended. Do you know why you have been recommended to transfer your pension benefits?”
The prospective client was not able to give me a complete answer.
In the UK in the 1990s, the Personal Investment Authority raised the distinction between “reason what letters” and “reason why letters”. The issue being that the provision of a report about the merits of a product was not the same as the reason for the recommendation. These letters developed into what we now know as suitability letters.
Moving forward to 2007, the Financial Services Authority listed the requirements for suitability letters by suggesting a principles-based approach, and has renamed them as suitability reports.
Under the requirements firms need to:
- establish a client’s financial situation, investment objectives and knowledge and experience, in order to provide a suitable recommendation
- continue to explain to customers in writing the reasons why the firm has concluded that a recommendation is suitable for the customer
- While the FSA is a regulator and a suitability report is a requirement for advisers in the UK, they clearly have merit in the offshore arena too.
Clients with such reports will be able to make informed decisions based on these recommendations, leading to a far better client-adviser relationship over the long term.
These suitability reports will also offer some protection to the advisers. It may well be that, from a consumers’ point of view, this is a secondary consideration but it is nonetheless important for two reasons.
- A client that has been provided with all the reasons and facts for a recommendation is unlikely to go ahead with the recommendations if he/she has any concerns. Therefore there will not be a future complaint as the recommendations were not taken up.
- Advisers, nowadays, are sometimes faced with spurious claims, possibly triggered by a competitor, and a well-constructed suitability report will offer the adviser protection against such spurious claims.
At some point in the future there is always the chance that a client will question the advice that was given in the past and so it is imperative that there is a clear record to demonstrate the reasoning behind the recommendations at the time of implementation.
A good suitability letter will have met the client’s needs and objectives at the time of the recommendation. The letter will be dated and there should be evidence that there was a reasonable amount of time between the delivery of the letter and implementation, so that the client had time to read and digest the contents.
It stands to reason that getting the “reasons why” correct at outset will stop the “what was the reason for selling me this” problem later on.
Chris Lean is a consultant at Prague-based Square Mile Financial Services