Suitability letters/ reports

From 1 November 2007, the existing ‘Know your customer’ and Suitability requirements are replaced by a new formulation of these rules. While we see the new rules as consistent with the objectives and expected outcomes of the pre-November rules, and as reinforcing existing expectations, the presentation of the requirements is different. Firms will 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.

Suitability letters will be renamed ‘suitability reports’ to better align our rules with MiFID client reporting terms. However, this change in terminology does not imply the need for greater detail or longer length.

Although from November the suitability obligations are extended to professional as well as retail clients where MiFID-scope business is concerned, we have not extended the requirement for a suitability report.

It is up to firms which document they use to satisfy the suitability report requirement, and its content, as long as the outcome is delivered.

We appreciate that many firms want to offer their clients holistic financial advice and take pride in producing full financial reports. A suitability letter/ report does not have to be a separate document and it could, for example, form part of a full financial report. However, the part that serves the purpose of a suitability letter/ report should be prominent. This means that you should pay attention to the way that the report is laid out and take care to draw the customer's attention to the most significant contents of the report, including any product recommendations and associated risks. Although we have seen many financial reports that are very good, we have also seen 16 or 17 page documents without any table of contents (or indeed any section headings), which contain a lot of industry jargon and which jump from topic to topic. This type of report is unlikely to be read by clients.

You may wish to do so but remember that what is important is that the suitability letter/ report itself is clear and concise. This will encourage your clients to read it, whether or not you ask them to confirm that they have done so.

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There is no right or wrong length, although "less is more" will often aid clarity. A better example of a suitability letter/ report should explain simply and clearly why the recommended transaction or product is suitable for the client, in light of:

• the client’s financial situation;
• the client’s knowledge and experience;
• the client’s investment objectives;
• the client’s attitude to risk both in general terms and to the specific area of need and recommendation; and
• any specific risk warnings.

Our experience shows that information can be missing or becomes lost in unnecessary or irrelevant text. For example, information relevant to higher rate taxpayers being given to basic rate tax payers or even those who were not taxpayers at all. Also, we have seen information from product provider marketing literature being replicated, often at length and in some cases more than once. Better examples of suitability letters/ reports would not include irrelevant information and would refer the client to product literature (for example in Key Features documents), inviting the client to ask for more details if anything wasn't clear. Suitability letters/ reports should be sufficiently balanced, drawing out the positives and any disadvantages that may be present within the recommendation.

The suitability letter/ report should be sent when, or as soon as possible after, the recommendation is made. In any event, if the recommendation is for a life or pensions product, then currently it must be sent before the post-sale cancellation notice (under the new rules, it will still need to be sent prior to the conclusion of the contract for a life policy). If you do prepare the suitability letter/ report in advance of a recommendation then you should be prepared to amend and re-issue it as necessary.

In principle there is nothing wrong with standard paragraphs and clearly they can be useful in a number of ways. For example by helping you to issue suitability letters/ reports promptly or to ensure that you use appropriate wording for any general risk warnings. However many poor suitability letters we looked at were overlong and made extensive use of standard paragraphs. In particular, they were full of product details and the risk factors of various products but they did not explain or highlight any factors that were specific to the client's circumstances. They often tried to fit the client's attitude to risk to the recommendation made, whereas the reverse should happen. In the worst cases, the suitability letters we looked at consisted solely of standard paragraphs with no personalisation at all, this is not acceptable. The other significant problems are to do with length and style. It was evident during the project that the use of standard paragraphs tends to add to the length of suitability letters/ reports, which makes it less likely that clients will read them. In addition, the coherence of the letter/ report will suffer where text has been pasted into it from a variety of sources written in different styles. This may mean that the reader becomes confused as to the purpose and content of the letter/ report, further reducing its effectiveness.

The issue here is similar to the question above about standard paragraphs. A good suitability letter/ report is concise and easy to understand. It gives a reasoned explanation of the risks and a reasoned selection of product and product provider information. It explains the risks that are specific to the client's circumstances and the product. The letter/ report repeats the main elements of the discussions that have taken place between the adviser and client. A software package can do some - but not necessarily all - of these things.

You could include details of these if they help to demonstrate why the product recommended was suitable. Otherwise you do not need to mention them. If you recommend a product which the client rejects, you could mention it in the suitability letter/ report.