The Fund Switch and the Suitability File
A firm's adviser, Sam, recommends that a 58-year-old client, Aisha, switches her £150,000 pension from a diversified default fund into a concentrated emerging-markets equity fund. Aisha has a moderate risk profile, a 7-year horizon to retirement and says she 'wants better returns'. The fund has fallen 18% over the last year. Sam's file contains a completed risk questionnaire, a product illustration and a signed application, but no record of why the switch is suitable or of the alternatives considered. The firm's compliance team is reviewing the file under its suitability and TCF obligations.
1. Assess whether the advice is likely to be suitable and what the file deficiencies mean.
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On the face of it the advice looks unsuitable: a concentrated emerging-markets fund is high-risk and volatile, inconsistent with a moderate profile and a 7-year horizon (a market fall near retirement could crystallise losses). 'Wants better returns' is an objective, not a risk tolerance. The file lacks the reasoning that would justify the switch - no comparison of the existing fund, no consideration of a less risky alternative, no capacity-for-loss discussion. Under FCA suitability rules the firm must be able to demonstrate the recommendation was suitable; a file that cannot do so is a breach even if the advice happened to be right. The compliance team should treat this as a potential mis-selling and TCF (Outcome 2/4) issue.
2. What should compliance do, and what records should have existed?
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Compliance should: (1) review the advice against the client's objectives and risk profile; (2) contact Aisha to confirm her understanding and whether she was told of the risks; (3) consider remediation (e.g. switching back, redress) if the advice was unsuitable; (4) review Sam's other files for a pattern; (5) feed findings into training and monitoring.
The file should have contained: the client's objectives and attitude to risk (evidenced, not just a questionnaire score); the reasons for the switch and why alternatives were rejected; a comparison of charges and fund risk; the capacity for loss; the client's understanding confirmed; and a suitability report given to the client. Good record-keeping is itself a regulatory requirement and the best defence against a later complaint.