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