This section of our website describes how we approach cases involving disputes about the "suitability" of an investment, when advice has been given by a financial business.
In considering complaints about the sale of investments, we often need to decide whether an investment was a suitable recommendation for the particular customer.
Since April 1988 regulatory standards have included a requirement that, when providing advice, financial businesses should only recommend "suitable" investments.
This section provides more detailed information about our approach when assessing "suitability".
When considering complaints about the sale of investments, we take into account the regulatory and legal standards that applied when the recommendation was made.
recommendations made before 29 April 1988
There were no regulatory requirements, but legal standards applied. If a financial business provided a recommendation, it had to advise with reasonable care and skill.
Complaints arising from sales made before 29 April 1988 (so-called "A Day") are now not common. Most have arisen in relation to sales of mortgage endowments. We have published a technical note on our approach to mortgage endowment complaints about pre-"A Day" sales.
The same legal principles apply to recommendations made after 29 April 1988. But as the regulatory framework since then has imposed duties that are at least as demanding, we generally refer only to the regulatory requirements when considering recommendations made after 29 April 1988.
recommendations made between 29 April 1988 and 30 November 2001
While there were a number of regulators over this period, the regulatory requirements were broadly the same. Financial businesses were required 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 for the consumer.
from 1 December 2001 - Financial Services Authority rules
The Financial Services Authority (FSA) became the regulator on 1 December 2001. Its rules continued the requirements for financial businesses to "know your customer" and to recommend suitable investments.
The FSA principles applied to all authorised financial businesses dealing with retail customers said:
Principle 9 (customers: relationships of trust)
"A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement."
The FSA's investment Conduct of Business (COB) rules between 1 December 2001 and 30 October 2007 said:
COB 5.3.5 R
"A firm must take reasonable steps to ensure that it does not in the course of designated investment business:
(a) make any personal recommendation to a private customer to buy or sell a designated investment;
unless the recommendation or transaction is suitable for the private customer having regard to the facts disclosed by him and other relevant facts about the private customer of which the firm is, or reasonably should be, aware."
The Financial Conduct Authority (FCA) became the regulator on 1 April 2013. Current rules set out in the Conduct of Business Sourcebook (COBS) and adopted by the FCA say:
COBS 9.2.1 R
"(1) A firm must take reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its client.
(2) When making the personal recommendation or managing his investments, the firm must obtain the necessary information regarding the client's:
(a) knowledge and experience in the investment field relevant to the specific type of designated investment or service;
(b) financial situation; and
(c) investment objectives;
so as to enable the firm to make the recommendation, or take the decision, which is suitable for him."
The precise formulation of regulatory requirements at the time of the sale/advice may have a bearing on the outcome of a complaint relating to suitability. But in our experience, the general issues for consideration in complaints involving suitability are largely common to all the sets of rules issued by the relevant regulators since 1988.
So in this section we do not distinguish specifically between the sets of rules relating to suitability that have applied since 1988.
When assessing suitability, we look at:
We then make an objective assessment of the recommended investment's suitability in the light of these factors. In making this assessment, we are careful not to apply hindsight. For example - the fact that the investment has not performed well does not determine whether or not the investment was actually suitable.
And that fact that another investment has performed well does not make that investment more suitable. Similarly, the fact that the customer's circumstances have changed will only be relevant to the assessment of suitability in so far as that change was reasonably foreseeable at the time.
If we conclude that the recommended investment was unsuitable, we would normally uphold the complaint and consider telling the business to pay redress. Redress in these cases is typically aimed at putting the customer back into the position they would have been in if they had not been given the poor advice.
where there were a number of suitable options
Sometimes there may be more than one investment that would have been suitable. But we do not usually uphold a complaint just because there could have been other suitable recommendations.
When considering whether an investment was a suitable recommendation, we look at the consumer's circumstances and needs when the recommendation was made. The circumstances and needs which are likely to be relevant include:
Any of these factors may be significant when determining suitability.
if the circumstances are disputed
Where there is a dispute about a consumer's circumstances, we decide on the balance of probabilities what the circumstances were likely to have been, in the light of all the available evidence.
Among other things, we take into account the information (if any) recorded by the financial business at the time of sale, as well as the consumers' own records (if any) and recollections.
attitude to risk
Some financial businesses' records include information, recorded at the time of the recommendation, about the consumer's "attitude to risk".
This can be a helpful indication of what the customer's "appetite" for investment risk might have been at the time. We give more weight to written "attitude to risk" statements if they were completed at the time of the sale, are clear and unambiguous, and are expressed in terms that were likely to be understood by the customer in question. A customer's signature on the document will add to the weight we attach to the statement - but it is not a decisive factor.
The descriptions of "attitude to risk" used by businesses vary significantly. So care needs to be taken in considering cases that involve broad and generic descriptions of risk (such as "low" or "adventurous"). Typically, businesses will supplement these descriptions with additional points, to illustrate their intended meaning.
In some cases, the consumer's other circumstances at the time - or the way their "attitude to risk" has been recorded - might suggest that their actual "attitude to risk" at the time was different from the one the financial business has recorded.
For example - if the consumer has modest financial means, little investment experience and a clear need for stable future income, it will be difficult to square these circumstances with, say, a recorded attitude to risk of "adventurous".
In cases like these, before we reach a view on the consumer's likely attitude to risk at the time of the recommendation, we consider the consumer's understanding at the time, what the adviser told them, and how any scale recording "attitude to risk" was explained.
However, where there is a clear and coherent record from the time, setting out the reasons why the risk was compatible with the customer's circumstances - and we are satisfied that the relevant issues were explained to the consumer - it is unlikely that we would decide a case based on a different "attitude to risk" from that recorded at the time of the sale.
Particular issues arise when considering "low risk" customers, especially where there was no facility for the customer and adviser to discuss options, other than accepting some investment risk.
incomplete or missing records
If a financial business's records are incomplete or no longer available, this does not lead to any automatic conclusion on our part about the merits of the dispute. In these circumstances, we may need to reconstruct from the evidence currently available what the consumer's circumstances were at the time of the sale.
We would take this into account - together with information about the product that was sold following the advice - in deciding whether or not the advice was suitable for the customer at the time.
When considering whether an investment was suitable for a particular consumer, we look at the particular features of the recommended investment. The features likely to be relevant include:
Product providers may label their investment products in various ways. We do not take those descriptions at face value, but we do give weight to the professional judgments made at the time about the inherent risks of the investment.
We will not uphold a complaint against an adviser, where information about the true nature of the product was hidden or not reasonably available to a competent adviser, acting with due skill and care.
But we may uphold a complaint where the adviser has recommended a product that was unsuitable, because they failed to act with due skill and care in considering the substance of the investment, as well as how the product provider had labelled it.
transparency is not the same as suitability
Where a business is giving financial advice, providing consumers with product literature that explains the features and risks of the recommended investment does not absolve the business from responsibility - if the investment was unsuitable given the consumer's individual circumstances.
Generally consumers are entitled to rely on the advice they receive - and they cannot be expected to "second guess" recommendations they are given by their adviser.
But clear documentation directed at the consumer personally - such as a "reasons why" letter or a suitability report - can be persuasive evidence that the recommendation was suitable for the consumer.
For example - we might be persuaded it is likely that the consumer was prepared to take the risks associated with the recommended investment, if those risks were clearly explained (in terms that the investor is likely to have understood) in a personalised suitability report.
If the consumer was investing a significant amount, we will look at whether the financial business considered "diversification" (that is, spreading the investment across a range of products or areas), when we consider whether the investment recommended was suitable.
Whether the amount is significant is likely to depend on the consumer's own individual circumstances and objectives - and in particular on the amount invested and whether the consumer has other investments or savings.
The fact that an investment has made a loss does not of itself make the investment unsuitable.
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