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FCA on Assessing Suitability: Research & Due Diligence of Products & Services

3rd March 2016

The FCA recently reported their findings from having undertaken a Thematic Review (TR16/1) on ‘Assessing suitability: Research and due diligence of products and services”.

The details within TR 16/1 provide a high level report of the FCA’s findings in relation to the research and due diligence processes carried out by advisory firms on products and services recommended to retail clients.

The Thematic Review considered how firms review the market and also to make sure that suitable solutions for retail clients are being recommended.

Previous thematic work undertaken by the regulator has often shown the following as being root causes for poor consumer outcomes:

 poor quality of an advisory firm’s research and due diligence

 incorrect risk profiling; and

 costs (for example in relation to replacement business)

The FCA’s Findings:

On the whole, the regulator found that from the firms reviewed, most sought to achieve positive outcomes for clients when undertaking due diligence and research. In addition firms also largely demonstrated some good practice in this area.

However, the FCA found that firms did not show the same good practice consistently across all products and services, with varying levels of poor practice uncovered requiring immediate redress.

Going forwards, it is expected the FCA will publish a second consultation paper later in the year with regards to MiFID II and anticipate that this will include requirements in relation to research on products.

 TR16/1: Assessing suitability: Research and due diligence of products and services

FCA on Assessing Suitability

Research & due diligence requirements:

The following extract from the FCA’s TR16/1 outlines the wider range of requirements that when combined ensure firms deliver good client outcomes.

“Competence – the advisory firm must ensure its advisers are adequately competent on the subject of the product or service concerned. Advisers are required to be competent in the regulated activities they undertake, such as advising on investments.

Research and due diligence – we use this expression in this paper to refer to the process carried out by the firm to assess (a) the nature of the investment, (b) its risks and benefits and (c) the provider (to establish whether they believe it appropriate to entrust the provider with client assets). The firm needs to understand these factors in order to judge whether the solution is suitable.

Assessing suitability – once advisers are competent in the nature of the investments and understand the individual product or service, they should be able to judge for each client if the solution is suitable.”

FCA, TR16/1, February 2016