FCA raps wealth management firms over client risks

Regulator finds that firms are not doing enough to properly match customers with investment products

Wealth-management firms must do more to ensure that their products are right for customers and clients, according to UK regulator the Financial Conduct Authority (FCA).

Its call for improved information in the investment-portfolios arena arrives in the wake of a recent review, in which the body explored whether products and customers were being routinely mismatched, despite lurking risk factors.

That review was conducted as a follow-up to a previous investigation of the sector, which concluded in 2011. In the aftermath of that probe, the FCA dispatched a letter to numerous wealth-management firms to warn them of several, concerning findings.

For example, 14 out of 16 firms were judged to pose a high, or medium-high, risk of detriment to their customers, based upon the proportion of client files that posed a risk of unsuitability – or for which suitability could not be fully determined.

Overall, 79% of the client files examined fell into those categories.

Meanwhile, 67% of files were inconsistent with one or more of the following benchmarks: the firm’s house models; the client’s documented attitude to risk; and the client’s investment objectives.

As the letter noted, that probe immediately led the FCA to engage in regulatory action with two, unnamed firms to mitigate the sector’s risks.

While the latest review has shown that the industry has made tangible improvements, the FCA notes that firms could still do a lot better – particularly on gathering the kind of data that will help them pair the right products with the right clients. It found that:

  1. A number of firms have taken steps to a) improve, and b) demonstrate the suitability of customer investment portfolios;
  2. Many firms have yet to make substantial improvements in gathering, recording and regularly updating customer information to support the investment portfolios they manage on behalf of their clients;
  3. Firms need to do more to ensure that the composition of the portfolios they manage truly reflects the investment needs and risk appetites of their customers – especially those who have a limited capacity, or desire, to expose themselves to the risk of capital loss; and
  4. firms need to ensure that their governance, monitoring and assessment arrangements are sufficient to meet their regulatory responsibilities in the field of suitability.
  5. FCA director of supervision, investment, wholesale and specialists Megan Butler said: “The UK wealth management industry plays a vital role in delivering financial services. 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.”

    Butler stressed: “Getting suitability right is fundamental to providing a portfolio management service that meets customers’ needs.”

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