The need to ensure that investments are suitable for clients continues to be as important as ever, as perhaps the recently closed property funds and the Neil Woodford saga in the UK have shown. This article looks at how wealth managers stay on their toes and on the right side of the regulators.

After the 2008 financial crisis regulators clamped down on what was seen as an overly aggressive sales culture, perhaps feeling sheepish after certain financial products blew up and claims of mis-selling mushroomed. The word “suitability” was bandied about. The UK regulator sent “Dear CEO” letters to wealth executives reminding them to tighten up their act. The arrival in 2013 (was it really that long ago?) of the UK’s Retail Distribution Review series of reforms to how financial advice is provided was designed to tighten the screws. And the European Union’s MiFID II reform package, taking effect two years ago, was also designed to make financial advice and dealing more transparent and accountable. A lot of work is being done by regulators to explore how the insights of behavioural finance can give advisors a better handle on what is most “suitable” for clients. (We have written about this earlier in the year.) But problems remain - arguably the Neil Woodford fund saga is a reminder that what might appear "suitable" for some investors, is not. 

To explore some of these issues further is Lee Garf, general manager at NICE Communications and Financial Markets Compliance, NICE Actimize. The editors of this news service are pleased to share these views with readers and invite responses. The usual editorial disclaimers apply to comments from outside contributors. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Across Europe and Asia, the term “suitability” seems to be as popular as the tongue-in-cheek reference “Brexit”. With the Financial Conduct Authority in the UK leading the charge, regulators are consistently re-evaluating their expectations surrounding suitability rules, and because of this continual change, there has been uncertainty in the marketplace.

From 2017 to 2018, the FCA alone assessed 1,142 cases in 656 firms and said it was “disappointed” to find the advice sector provided “unacceptable disclosure” in 41.7 per cent and “uncertain disclosure” in 5.4 per cent of the reviewed cases. Although feedback was provided to the evaluated firms, the UK regulator is expecting greater progress from firms as they react to the reviews. According to its more recent annual report, the FCA plans to reassess the suitability of advice in 2019, with an emphasis on customer disclosure.

It is not surprising, then, that suitability remains a serious concern for wealth managers. In a recent research study, benchmarking firm Compeer found that wealth managers still view suitability compliance as a major issue. Forty-four per cent of respondents reported increased compliance costs as a direct result of carrying out ongoing suitability testing. Despite this, one in four firms still handle suitability manually, while 76 per cent use a combination of technology and manpower. On the surface, this dynamic is difficult to explain. Firms are spending more money on compliance and using technology to augment compliance personnel – but they’re still not meeting the expectations of regulators.

How should firms bridge the gap? The answer may lie in changing how wealth managers approach supervision entirely. Sometimes it is not simply what you do, but how you do it.

Wealth managers around the globe communicate with their clients on a very personal level. The information gleaned from the emails, chats and phone calls can be essential to developing a proper investor profile and responding to the needs of individual clients accordingly. But as telling as these communications are, they are rarely analysed to the depth required to develop accurate client risk profiles, to determine if information was properly disclosed, and whether investors were adequately educated on all available options. The surveillance technology many firms have come to rely on simply isn’t up to the task.