Posted: 19th June 2013

You only have to glance at the priority risks in the Financial Conduct Authority’s business plan 2013-14 to know that investment suitability will attract supervision and enforcement activity this year. The priority risks include products and advice not tailored to customer needs, complex products, an over-reliance on technology, lack of customer protection, lack of transparency and customers taking on too much risk. Add to these issues reduced choice for consumers in high street advice. What results? Issues that span all three FCA statutory objectives: consumer protection, market soundness and competition. A perfect storm, if you like.

The concerns of the 2011 assessing suitability paper remain. The FCA is clearly dismayed that improvement has not been forthcoming. Given increased qualification requirements post RDR, investment suitability tools and regulatory scrutiny, it remains a challenge that firms have not yet changed their ways.

Customers are looking for alternatives to low interest rates on cash deposits and poor yields from government bonds. Given the recent successes in equity markets, customers could be forgiven for thinking that this investing lark is easy. That takes customers and advisers into dangerous territory. Recent experience is that customers are displaying traits of overconfidence and inflating their risk profiles to match current market opportunities in equities; and they do so, in the main, unchallenged by advisers.

Complexity of investment products is again mentioned in the 2013 risk outlook. Although the media is awash with high profile failures such as Keydata and Arch Cru, complexity in the investment market can exist in the most mundane of places. Take platforms: does the average customer understand the concept of a platform or even want to manage their portfolio online? Do they get value from re-balancing and need a choice of 2,000 funds? Have they grasped the difference between a product and a wrap? Some do understand, but some just want a product that delivers to expectations.

The FCA’s stance on what exacerbates failures in risk profiling is poor documentation. The need for improvement applies to the market in general, but is aimed at wealth managers in particular. The JP Morgan International Bank fine only adds fuel to this fire. Wealth managers have so far failed to appreciate that in a field where complex and risky investment strategies are abound, comprehensive documentation can help demonstrate their skill, knowledge and worth.

Whoever your client, whether high net worth or not, the basics must be in place: align objectives with circumstances, deliver tailored profiling and challenge risk attitude and capacity for loss, supporting this with robust documentation. As the Sesame fine, shows, there is simply no substitute for the combination of astute advice and comprehensive documentation; it will provide cover for your firm in what promises to be an increasingly stormy time for the investment industry.

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