Over the past few weeks, firms have been receiving feedback from the FCA following its suitability review started last year. With over 1,000 files from 700 firms examined, we are getting a clearer picture of just how well the industry is meeting suitability expectations. The initial noises appear to be broadly positive, which is encouraging .
Our own experience mirrors this early feedback. There certainly seems to be much thought going in to how firms get all the appropriate information across to clients in a way in which they can easily understand.
But where do the challenges still exist? The FCA makes it clear what areas it is interested in from an advice perspective and these will come as no surprise:
- Know your client
- Research and due diligence
- Recommendations for central investment propositions
- Replacement busines
- Dealing with insistent clients.
While we are not seeing too much evidence of an increasing number of insistent clients for firms to deal with, there are some cautionary comments regarding CIPs and replacement business, particularly around value for money and clarity of charges disclosure. The key question is: Are you making it as clear as possible to your client what they are paying for and what that means in cash terms?
The FCA has pointed out time and again in its guidance, principles, Cobs and forthcoming Mifid II requirements that: “If you are unable to answer ‘yes’ to the following questions, you may not be meeting our requirements:
- Can your clients understand your charging structure?
- Do you disclose your initial and ongoing charges in cash terms?
- If your charge is a percentage do you provide cash examples?
- If you charge an hourly rate do you provide indicative examples?”
Moving on to the issue of research and due diligence, we are aware most firms, regardless of size, now have an investment committee to review the approach, effectiveness and performance of their investment strategies.
A number of firms run this solely as an in-house function; others have external input. The important point here is the committee has a clear terms of reference relevant to the firm and its clients and it meets those requirements in relation to areas covered, frequency and attendance.
Perhaps the most critical aspect, however, is the quality and clarity of the decision-making process. As you would expect, concise, well documented minutes must be able to clearly show the course of action taken and the rationale.
Finally, while most of the firms we looked at provide a hands-on, face-to-face service, almost all are considering some form of technology enhancement and, in some cases, a robo-advice solution. This poses a further challenge.
If suitability advice standards have improved (as appears to be the case) this would suggest firms’ compliance functions are having a positive impact. This confirms our view that the compliance function is maturing and moving its position from administrative box-ticker to business partner, with a seat at the top table to influence future strategy with a proactive stance rather than be a reactor to a problem.
Maintaining independence will be key. If the drive to providing more technology solutions impacting client outcomes continues, then compliance functions will need to develop new skills to be able to keep pace and continue to drive standards forward. Now is not the time to be resting on laurels.
Simon Collins is managing director, regulatory, at Eversheds Sutherland Consulting