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FCA eyes enforcement over wealth manager failings

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Wealth managers are failing clients on suitability, with two-thirds of firms falling short of the FCA’s expectations, a thematic review has found.

The FCA is considering enforcement action against five of the 15 firms it reviewed as they need to undertake “significant remediation programmes to raise standards”. The regulator is also considering forcing the firms to carry out S166 reviews.

The findings of the thematic review, released today, follow a number of previous actions from the FCA, including a thematic review in 2010, a Dear CEO letter in June 2011 and further work in 2012.

Some improvements have been made in the industry since that work began, but the FCA says many firms are still unable to demonstrate suitability due to a lack of up-to-date customer information, poor risk profiling or failure to record customers’ financial positions.

The research by the FCA found a third fell substantially short of expected standards and a third needed to make some improvements. The remaining third “raised no substantial concerns”.

The regulator looked at 15 firms and 10 randomly-selected files from each firm.

The FCA uncovered inconsistencies between portfolios and customers’ attitude to risk, investment objectives or investment horizon.

Of the 150 client files, 23 per cent had a high risk of unsuitability, 37 per cent were unclear and 41 per cent showed a low risk of unsuitability.

The results are an improvement on the previous review, with the proportion of high risk or unclear files falling from 79 per cent to 59 per cent.

Megan Butler, FCA director of supervision for investment, wholesale and specialists, says: “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. Getting suitability right is fundamental to providing a portfolio management service that meets customers’ needs.”

Main messages from the FCA’s thematic review:

  • A number of firms have taken steps to both improve and demonstrate the suitability of customer investment portfolios
  • Many firms 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 do more to ensure that the composition of the portfolios they manage truly reflects 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
  • Firms need to ensure that their governance, monitoring and assessment arrangements are sufficient to meet their regulatory responsibilities in relation to suitability


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. I would be fascinated to know how the regulator, without intimate knowledge of the client, can judge whether a portfolio is suitable or not.

    Once again we have the implication that we need to drown the client in paperwork – which we all know they hardly or ever read.

    Sure capacity for loss is important (risk is unquantifiable). But it should be made clear that all investment have a risk. If you want low or little risk – just keep your money in cash and risk inflation erosion and very poor returns. All equities have a risk; as do fixed interest securities. Only by hindsight do we discover how risky – which actually means volatile – an investment actually is.

    Then of course there is time. A 30 year old with a good income may have a better capacity for loss over the long term than a retired 75 year old. Even then, the 75 year old needs exposure to the markets if they want to combat inflation. So please you bureaucrats let’s make it simple. If you invest there is risk – this is not accurately quantifiable. Capacity for loss is easier to ascertain. Therefore if say the client has £100k and their capacity for loss works out at say £20k then only £20k should be invested on the understanding that the value will fluctuate. The rest is kept in cash. Those with a low loss capacity will have to swallow that. You can’t have it all. Greed and fear are not bedfellows. And advisers also can’t have it all. Sometimes you just can’t accumulate the whole wad for your funds under management charge. Then perhaps the jobsworths at Canary Wharf can find something more useful to do than encourage the compensation culture.

  2. Is this very important, YES VERY, as it is the basis on which future claims against advisers will be judged? The regulator through its failure to provide clear examples of what is correct are leaving all advisers opens to claims. How long is a piece of string, is how this is feeling and looking at this time. Yet again we have a situation where by the regulator is stating “it’s not good enough”, but is unwilling, unable or more likely both to provide what is.

    I have yet to be shown any examples of what is acceptable to the FCA, not one clear example. I hear lots of words, thoughts and table banging, but no real substance. Will we ever receive a clear, agreed and workable process form the FCA for ATR? It’s like looking for a fairly at the bottom of my garden, for some reason what is required is a mythical certainty that no one seems to be able to find. We all know what it looks like, but can never find or produce one. It also disappears when you need protection or to prove they exist, they just disappear in the wind.

    In one hand the regulator wants simplified products offered at a reduced cost to try and reduce the advice gap, in the other hand it want war and peace on file, which costs time and money to produce. How much documentations, how many risk warnings and complicated literature will be enough, what we already have confuses the consumers or sends them to sleep. Again we are told to simplify in one breath and in the next over complicate.

    Before long we will need to undertake a three hour meeting, face to face, have the consumer take an exam based on the book they had to read, the three hour meeting, to gain a pass mark that they understand their attitude to investment risk.

  3. Maybe the FCA could spend their time a little better investigating and shutting down the unregulated investments that seem to constantly cause us massive FSCS bills. We pay dearly for their continued failure to do anything that is actually useful.

    If these wealth managers are creating loads of complaints then the FCA should be in there investigating. It seems that what the FCA are saying is that they cannot prove that the advice is correct. What happened to innocent until proven guilty (sorry, forgot that scummy financial advisers don’t get the same human rights as everyone else)? The FOS will sort out these wealth managers very quickly if they are actually causing consumer detriment. If they are not causing consumer detriment then what actually is the problem? The file doesn’t meet some mythical standard that is never actually laid down in writing despite 10,000 pages of pointless rules.

    Instead what will happen is that some perfectly viable firms will be subject to an S166 order (which should be illegal on the basis that even murders don’t have to pay for their police investigation), which on top of their massive FSCS levy, and the overall cost of compliance will send them over the edge. They will collapse and then the claims managers, sensing some low hanging fruit, will start firing claims into the FSCS and there will be no firm to defend them.

    The FCA seems to be failing even worse than the FSA, PIA and Fimbra. Why can’t they concentrate on the actual issues rather than taking worthless potshots at easy targets. They are completely and utterly useless.

  4. Keep your hair on guys! – They are not talking about IFA’s or Financial Planners here. It’s so called wealth managers (stockbrokers) who historically never have had to deal with the level of KYC and suitability awareness we’ve been used to for decades. They take on clients and run portfolios by numbers often without any care and knowledge of clients real objectives and attitude to risk. The FCA is right, they need to sharpen up.

  5. @Mark

    Not all Stockbrokers are ‘wealth managers’.

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