Dear CEO: Suitability

Regulatory Roundup 28 contained an article on guidance issued by the FSA on ‘Assessing suitability’. As a reminder, the ‘Suitability’ rules, which apply to both retail and professional clients, can be found in COBS 9. The same Regulatory Roundup also summarised the FSA Business Plan 2011/12, which included a warning that the FSA will extend its review of the suitability of wealth management firms’ clients’ portfolios, covering both discretionary and advisory management services.

Some firms may now have received a ‘Dear CEO’ letter from the FSA dated 14 June on this very subject.

The letter sets out the results arising from a review of 16 firms (a sample which included discretionary investment managers), with no less than 14 of them being judged to pose a high or medium-high risk of detriment to their clients (the letter advises that the FSA “are involved in ongoing regulatory action with these firms”).

Some, if not all, of the findings were fairly basic e.g. inadequate client classification; out of date, or absent, KYC; and inconsistencies between portfolios and the client’s investment objective and attitude to risk. The letter goes on to suggest that firms may wish to assess the suitability of client files if not recently done. Complyport clients will be aware that ‘Suitability’ already features in the recommended programme of monitoring devised by their consultants.

Note that recipients of the letter are expected to respond to the FSA to the effect that they have read and understood the content of the letter and considered the implications for their firm by 9 August.