As may be recalled, the FSA issued a ‘Dear CEO’ letter in June (see Regulatory Roundup 31) on the matter of ‘suitability’ (COBS 9) which referenced a review of 16 firms – with 14 of the firms being deemed to pose a high or medium-high risk of detriment to their customers.
Although not necessarily part of the review, a Final Notice issued to Credit Suisse (UK) Limited contains examples of suitability failings.
The Notice itself does not focus on COBS 9 failings – nor indeed even mentions COBS – but rather quotes FSMA s206(1) and Principle 3 (“A firm must take reasonable care to organise its affairs responsibly and effectively, with adequate risk management arrangements”). However as the words ‘suitability’ and ‘suitable’ between them make over forty appearances in the 15 page Notice it would seem reasonable to summarise that the heart of the matter was suitability and COBS 9. As might be expected, based on previous Final Notices, the failings cited included not having adequate system and controls in place.
The concern centred around the suitability (or the systems and controls in place in respect of the suitability) of advice regarding SCARPs to its private banking retail advisory customers.
Firms that provide advice – and COBS 9.1.3 reminds us that the concept of suitability also applies to a firm which manages investments – may wish to review the Notice and use it as a comparator against their own processes and procedures.
Section 2.3 of the Final Notice reinforces the importance of having adequate records in place e.g. on investment concentration “.. often no documentation available …”; on the use of leverage “… often no documentation available to evidence the rationale for recommending leverage …”; and in 17 of the 24 SCARP transactions reviewed by a skilled person there was “… insufficient evidence of consideration of the Customer’s overall portfolio … when determining whether the transactions were suitable for the Customer”.
The above illustrates ‘if it’s not written down then it doesn’t exist – especially in the eyes of the FSA’, a maxim which equally applies to areas ranging from board meetings to compliance monitoring.
Not for the first time the failings include a firm not having in place adequate systems to determine an investor’s attitude to risk. We would remind firms that the FSA published finalised guidance in March on ‘assessing suitability’ which includes establishing the risk a customer is willing and able to take. Although the guidance does mention ‘retail customers’, the suitability requirements of COBS 9 also apply, in the case of MiFID business, to professional clients subject to certain assumptions that can be made (see COBS 9.2.8).
For its failings, the firm suffered a penalty of £5.95m after the traditional 30% (Stage 1) discount.
