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Compound Growth

23rd June 2016

Following the recent ban of two unauthorised wealth managers this month, we remind ourselves of the recent regulatory spotlight that has been shined upon the wealth management industry.

Suitability failing by Wealth Managers

Published six months again in December 2015, the FCA’s Thematic Review, TR15/12, looked at wealth management firms and how they assess suitability of investment portfolios.

In the review, the regulator found that wealth managers are failing their clients with regards to suitability. In fact, approximately two-thirds of those reviewed were found to have fallen below the regulator’s level of expectation with half of these having fallen substantially below.

As informed in the review, the City Watchdog is considering enforcement action against 33% of the firms it reviewed due to the fact that the firms in question needed to carry out “significant remediation programmes to raise standards”.

In addition, the FCA also informed it was considered forcing firms to undertake S166 reviews i.e. independently commissioned reviews carried out by Skilled Persons.

However, this thematic review was not the first time the regulator aired their concerns over Wealth Managers.

Wealth Managers: Previous FCA Action

The FCA had previously undertaken work targeting Wealth Managers in 2012 following a Dear CEO letter that was issued to Wealth Management Firms in June 2011 and before that, a Thematic Review of suitability in 2010.

December 2015: Thematic review TR15/12 - Wealth management firms and private banks.

November 2014: Thematic review TR14/19 – Wealth management firms and private banks – Conflicts of interest: in-house investment products

July 2013: FCA Speech - The regulator’s pproach to supervising wealth management and private banking firms.

June 2011: Dear CEO -Letter to Wealth Management Firms

March 2011: Finalised Guidance FG11/5 - Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection

State of Play: A long way to go

Whilst the results from the most recent Thematic Review were an improvement to the regulator’s previous review scrutiny, at the time TR15/12 was published last year, the FCA still had concerns. Particularly about risk profiling, since several firms showed inconsistencies in how clients’ attitudes towards risk were documented.

During the review, many firms were still unable to demonstrate adequate suitability assessments – not only for inadequate risk profiling and/or failure to record customers’ financial positions but also due to the lack of current and up-to-date customer information.

Since only one-third of those firms reviewed “raised no substantial concerns”, it seems Wealth Managers still have a long way to go in the eyes of the regulator.

As Megan Butler (the FCA director of supervision for investment, wholesale and specialists), said:

“It is positive that a number of firms have taken steps to improve and demonstrate the suitability of their clients’ investment portfolios. We are concerned, however, that some do not appear to have heeded the messages we have put out in recent years, and taken steps to identify and correct problems we’ve previously identified. Getting suitability right is fundamental to providing a portfolio management service that meets customers’ needs”

FCA, Dec 2015

Wealth Managers: Action for improvement

The key areas of the regulator’s concern and thus action points for Wealth Managers are:

firms need to have taken steps to both improve and demonstrate the suitability of customer investment portfolios;
a number of firms still have to make significant improvements in gathering, recording and regularly updating customer information to support the investment portfolios they manage for customers;
firms need to do more to ensure that the make-up of the portfolios they manage truly reflects the investment needs and risk appetite of their customers

in particular, those who have a limited capacity for, or desire to expose themselves to, the risk of capital loss.

firms need to ensure that their governance, monitoring and assessment arrangements are sufficient to assess suitability and thus meet their regulatory responsibilities.

What should Wealth Managers do now?

In light of the FCA’s focus upon the Wealth Management sector, management firms should look at the findings of the FCA’s review and consider if any of the issues that were identified apply to their own business and, if necessary, take action.

In particular, firms should pay close attention to how they determine suitability since this is an area the FCA is most concerned with. Do your practices and portfolios accurately reflect the needs and risk appetite of your customers?

If you would like support or assistance in reviewing your business practices or procedures for assessing the suitability for your customers, please get in touch with our experienced regulatory consultants at Compound Growth.

Suitability: Wealth Managers under Scrutiny

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Comment from the FCA:

“Some firms had not regularly updated customer information, and in some instances the information had not been updated for several years and appeared out of date. Customer information that is significantly out of date may create a risk of portfolios becoming inconsistent with a customer’s risk appetite and or objectives and resulting in an unsuitable portfolio.”

Megan Butler,

FCA director of supervision, investment, wholesale and specialists

(Dec 2015)