Posted: 16th March 2016

First published in March 2016 by New Model Adviser (Citywire)

Following its latest review of the suitability of retail investment portfolios, the Financial Conduct Authority (FCA) has concluded that only a third of wealth managers and private banks are meeting regulatory requirements. Without being alarmist, these results pose unacceptable risks to firms, with two-thirds needing to take action.

Extensive work undertaken by the regulator in the past, including thematic reviews in 2010 and a ‘Dear CEO’ letter in 2011, combined with this recent work, demonstrates that quality of advice in this sector is, and will continue to be, a key area of regulatory focus; so much so that we expect advice to feature heavily in a forthcoming risk outlook from the FCA.

Why are firms still struggling with suitability and what should they be doing to protect their business and ensure good outcomes for customers?

Cultural reluctance

In our view, issues persist because the majority of firms have not focused on addressing the root causes of suitability failings. Put simply, there has been a reluctance, which is largely cultural, on the part of advisers to obtain and document all of the information required to support a demonstrably suitable recommendation.

This includes know-your-customer information, attitude and capacity for risk, source of funds, the proposed investment in the context of the broader or full portfolio held by the client, and the client’s knowledge and experience.

From previous work we have undertaken with clients in this sector, it is clear that a failure to demonstrably evidence suitability does not necessarily result in unsuitable advice being given. For most firms, customer detriment was only identified in a limited number of cases. This could explain why, for some, the imperative to act may not be felt as strongly as it should be.

Commercial risk

However, aside from the obvious risk of regulatory intervention, an often overlooked issue in this area is commercial risk.

In the highly competitive wealth advice and investment market, a poorly articulated investment recommendation presents an opportunity for competitor firms to undermine the credibility and professionalism of a firm’s service and, ultimately, use this to take clients from the business.

There is no silver bullet: success in this area requires more than just getting the process right. Culture is ultimately king to delivering investment suitability.

How to change

Although aligning processes is important, this will not work in isolation. The key factor for success is embedding an appropriate culture that ensures advisers understand the importance of obtaining and joining up details of their clients’ personal circumstances and objectives and, ultimately, linking these to the recommendations they make.

To create the required culture, it is important for firms to retrain advisers to be engaging and professionally confident to ask the difficult, probing questions, capturing all the salient information.

Firms need to take a more holistic view of the advice process. They need to consider how they empower and develop advisers and create the necessary environment for them to achieve suitable outcomes on a consistent basis.

This must be done in a way that is aligned to a positive customer experience and that demonstrably reduces the risk of unsuitable advice being given.

How to be sure of suitability

  • Appraise the quality of the audit trail that underpins the advice given to clients. Benchmark this against the issues identified and standards expected by the FCA.
  • Where any deficiencies are identified, consider what steps need to be taken to prevent the issues occurring again in the future. Is it a policy, system or people related issue?
  • Once a line has been drawn, ensure appropriate remedial action is taken to ensure suitability not just in the future but also for legacy business.
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