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Is Coutts’ suitability warning the tip of the iceberg?

Is Coutts’ suitability warning the tip of the iceberg?

Coutts’ decision to warn all of its UK clients of potential suitability issues with their portfolios could just be the tip of the iceberg for the industry, leading voices have warned.

Earlier this month Wealth Manager revealed that Coutts is reviewing the suitability of investment portfolios across its entire UK client base. If investments are found to have been unsuitable, Coutts will send clients a compensation offer and the opportunity to exit the investment.

John Dance, managing director at Vertem Asset Management, expects to see a more interventionist approach from the Financial Conduct Authority (FCA) four years since it first urged the industry to take suitability seriously.

‘I think the regulator has spent a number of years warning, advising and throwing “last chance saloon” opportunities at investment companies,’ he said.

‘I don’t think it will be long before they effectively wind companies up if they have not addressed issues. I think their patience is running out and they will start taking firmer action. How long can it go on for?’

Coutts is not alone. A portion of the wealth management industry is getting to grips with how to prove the suitability of investments held for clients, particularly as historic systems and processes appear to have been inadequate. 

Dance recognises the difficulties large companies face in terms of proving suitability on a historic basis – a scenario that Coutts is currently grappling with as it reviews investments dating back to 1957. Nevertheless, he is shocked that some companies have taken so long to react to the regulator’s warnings.

‘I am surprised that a lot of industry participants have not really taken those opportunities to get their house in order. It seems strange that people are only addressing this now. It has been part of our environment for five or six years.’

He expects the payment protection insurance claims companies that have sought to win payouts from banks could now turn their attentions to investment advice. ‘I would not be surprised if “have you been given unsuitable investment advice?” is the next compensation culture.’

Following Coutts' example

Robert Hupe, a consultant at Knadel, expects other firms will be watching the fallout from Coutts’ internal suitability review carefully and could follow the private bank’s example.

‘I think there could be other organisations that follow suit and will naturally be looking to see the fallout from Coutts and how it has been received by clients and regulators,’ he said.

‘That may determine the way they follow suit. I do think there are a number of organisations that are not as far down this path as they should be and this, along with a continued focus from the FCA, should mean they continue to have this as a high priority for them to resolve.’

Hupe is still speaking to organisations that need to do more in terms of reviewing legacy positions and putting in place processes and controls for suitability.

‘I have not seen anything on this scale and I think Coutts is taking an admirable approach to dealing with this, as long as they can follow through, rectify and put processes in place going forward,’ he said.

He does not expect to see another regulator-led thematic review on suitability but anticipates further fines and Section 166s, where the watchdog forces firms to conduct costly reviews of their practices.

‘I think the regulator wants to keep this top of the agenda and at the forefront of wealth managers’ minds. One of their roles is about protecting the end-investor. This is as crucial to that as can be.’

Gina Miller, who set up the True and Fair campaign to achieve greater transparency in the investment industry, believes more needs to be done to get to the root of the problem.

‘The overarching problem is a lack of transparency. No other sector has these scandals happening without politicians or the regulator stepping in. The FCA insists on issuing fines, but this is not going to change behaviour. It just becomes a cost of doing business. Getting caught is not deterring behaviour in the industry, where clients are shoehorned into products that are not suitable.’

A spokesman at the FCA said suitability remains high on its agenda and pointed to measures including a commission ban and higher professional standards among financial advisers.

Only time will tell if these measures go far enough, but Coutts could prove to be the tip of the iceberg.

Getting below the surface of Coutts' suitability warning

  • Coutts chief Michael Morley has written to all UK clients to tell them the private bank has agreed with the FCA to review the suitability of all investment portfolios.
  • The review will conclude in early 2015 and relates to investments held by clients on 26 November 2012, the date Coutts implemented the retail distribution review (RDR).
  • Morley has said that if investments are found to have been unsuitable, Coutts will then send clients a compensation offer and the opportunity to exit the investment.

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