Compliance

UK Regulator Says Some Wealth Managers Still Don't Make The Grade On Suitability

Tom Burroughes, Group Editor, London, 10 December 2015

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Although hailing progress, the watchdog says some wealth managers and private banks have more work to do in ensuring clients' portfolios are suitable for their needs and risk appetites.

The UK’s financial regulator has praised the wealth management and private banking sector for doing more to prove their clients’ portfolios are suitable, but says some firms are still falling short.

The Financial Conduct Authority has carried out a “thematic review” around how well, or not, firms demonstrate that clients’ investments suit their needs and risk appetites.

“Wealth managers and private banks have made progress in demonstrating the suitability of their clients’ portfolios,” the FCA said in a statement. “However, some firms need to make substantial improvements in client information practices as well as ensuring the portfolios they manage truly reflect the needs and risk appetite of their customers."

The FCA said it will be “following up on these issues with these firms”, although it did not name them when contacted by this publication.

The issue of ensuring investment services and products suit what clients want and need has been one of the most significant and contentious challenges for regulators and practitioners in recent years. The heavy losses sustained in the 2008 financial crisis, and fears of mis-selling, have prompted the FCA to tighten up oversight of wealth management.

One bone of contention is around the notional figure of the “sophisticated investor”, because such characters are deemed to require less protection from complex, risky products and services than the mass retail consumer.

“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,” Megan Butler, FCA director of supervision, investment, wholesale and specialists, said.

In August 2015, the FCA and HM Treasury, the UK tax authority, launched the Financial Advice Market Review, which will examine how financial advice (including advice on retail investments) could work better for consumers.

In June 2011, the Financial Services Authority, forerunner of the FCA, sent a “Dear CEO” letter to wealth managers, stating that in 14 out of 16 firms it had, as a result of checks, unearthed “significant, widespread failings” with product and service offerings that posted medium or high risk of being unsuitable to clients.

 

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