In its latest report (TR15/12) resulting from a review of suitability of retail investment portfolios provided by wealth management and private banking firms the FCA found 60% of files to be unsuitable or unclear. This review builds on work carried out in 2010, which led to the FSA’s Dear CEO letter in June 2011 and was followed by further work in 2012.

The earlier work showed that many firms struggled to demonstrate the suitability of their investment portfolios through either poor recordkeeping or due to inconsistencies between the file and the client’s objectives, attitude to risk or other factors, including knowledge and experience. Client information, such as it was, was not kept current.

Although a number of firms have improved, many “still have to make substantial improvements in gathering, recording and regularly updating customer information to support the investment portfolios they manage for customers.”

Firms need to think carefully about two distinct issues:

  • do they do enough to ensure that the composition of the investment portfolios they manage truly reflect the investment needs and risk appetite of their customers, especially those who have a limited capacity for, or desire to expose themselves to the risk of, capital loss (a warning when dealing with cautious clients); and
  • are governance, monitoring and assessment arrangements sufficient to meet regulatory responsibilities in relation to suitability?

The FCA expects firms to take note of the findings and ensure that they are able to demonstrate how the portfolios they manage are suitable. It goes on the emphasise that firms need to embed practices that ensure that they are consistently reviewing and continuing to meet their customers’ needs where they have agreed to provide an ongoing service.

This is a paper that no provider of discretionary or advisory portfolio management services can ignore. Reading between the lines, services provided particularly to cautious clients are likely to come under scrutiny. Taking into account ALL charges and your client’s best interests, can the firm demonstrate that a cautious portfolio is suitable, taking into account interest rate expectations? Can staff clearly express a common understanding of how customer interests are paramount in the delivery of portfolio investment management services?

Two paragraphs are key:

We expect that, as part of its approach to monitoring, a firm should review how the overall investment portfolio meets the customer’s circumstances, risk profile, objectives and expectations. Otherwise, firms may not be able to detect whether customers are at risk of being provided with an unsuitable investment portfolio.

We expect wealth management and private banking firms to have robust governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, and internal control mechanisms.

Complyport address suitability issues through business as usual support, expert witness work and s166 reviews. Our experience covers advice on governance together with systems and controls. Of the 15 firms selected by the FCA only a third raised no substantial concerns. Some will be incurring the substantial expense of a past business review. For those yet to be tested, there is time to act. Our expert team, can audit files and test governance and controls. Sample file reviews will identify causes of failings, if they have occurred. Together with a review of oversight arrangements, recommendations will be made on current and potential future risk. This approach will help strengthen your business, and provide confidence that you are meeting customer expectations.

Interestingly, firms developing “Robo-Advice” systems will need to watch developments here carefully. The challenge is not only matching portfolios to expectations but maintaining suitability as the customer’s circumstances change.

Review 15/12 Review Service

To help you put your systems to independent challenge Complyport has packaged a 15/12 Review Service. In brief, the service includes:

  • a report detailing findings on suitability standards based on an agreed random sample of files;
  • a test of governance arrangements and control mechanisms; and
  • a challenge to prepare senior managers for the types of questions that might be asked by a supervisor following the Thematic Review.

For more information contact

Regulatory Roundup 71 – Thematic Review: Wealth Management & Suitability