The FSA remains determined to crack down on suitability failings it says are ‘widespread’ in wealth management, but have wealth managers now done enough to satisfy the regulator?
Last week the FSA reaffirmed a commitment to crack down on ‘significant widespread failings’ it had identified following a review of 16 firms last year. Fourteen businesses were judged to pose a high or medium risk of detriment to clients, causing the regulator to publish a ‘Dear CEO’ letter.
The FSA said that given the high failure rate, it believed similar problems were likely to found elsewhere within the industry, and it has now launched a wider thematic investigation, examining the suitability of client recommendations and internal safeguards and controls.
The watchdog also acknowledged that findings from the initial review had led to enforcement referrals, skilled person’s reports (or section 166s) and remediation programmes.
While further fines and section 166s represent a possibility, we asked the industry whether it has taken heed of the warnings, and if so, how?
One chief executive from a medium-sized wealth management company said the FSA’s Dear CEO letter had sparked a major review within the business, which he estimates will cost tens of thousands of pounds.
He agreed the FSA had been right to investigate the issue and said the company had discovered failures to demonstrate suitability on a number of client accounts, particularly at the smaller end.
‘We knew we had problems. The point here is documentation management and the ability to evidence suitability for all clients was not there,’ he said. ‘I understand why the FSA has picked up on this. The most vulnerable part of the client base is where it is hardest to evidence suitability, for example older and smaller clients.’
As a result of the Dear CEO letter, the firm has brought in external resources and consultants, adapted existing systems and gathering management information directly from this.
‘Absolutely we have a programme and recognise the FSA is fundamentally right about suitability. They have struck a raw nerve and even if you do not believe this and you put your head in the sand, you should have a programme to deal with it because it is too risky not to,’ the CEO said.
Ditching smaller clients
Perhaps the biggest consequence of the firm’s internal review is that it is likely to shed several smaller clients, who are increasingly unviable from a cost perspective.
The CEO anticipated this could amount to a double-digit percentage of the company’s client base, albeit representing only a small proportion of total assets under management.
While increased scrutiny of suitability, alongside adviser charging as part of the retail distribution review, is likely to leave smaller clients without advice, he believes this is a trend the FSA quietly supports.
‘Maybe this is what the FSA intended: that no advice is better than bad advice,’ he noted.
His comments on expenditure support research by consultancy Compeer, which recently found that an elevenfold increase in suitability spending across the industry, to around £100,500, had played a key role in driving expenditure on regulatory costs to an estimated 10% of total income.
For national wealth management firm Rathbones, the fallout from the suitability review appears to be less far-reaching.
The firm’s head of investment management Paul Chavasse said: ‘We think we are well positioned for this. We have not made significant changes, it has been more about tightening up what we are already doing. One of the key things we see coming out of it is that you have got to get documentation right.
‘It is not right if you know the client said this or that, but the information is buried in the investment manager’s head. It has got to be on paper and you need to have evidence this has been discussed with the client.’
Rathbones has bolted on work looking at suitability to other projects, so has not had to introduce a large IT project at a significant extra cost. Chavasse also noted the firm was unlikely to lose any clients, particularly at the smaller end, as a result.
Is technology part of the problem?
Robert Hupe, a consultant at Knadel who has run ‘suitability health checks’ at several companies, says the review has caused some firms to bring forward investment in IT systems.
However, he stressed that an over-reliance on technology, particularly risk profiling tools, can lie at the heart of the problem. ‘I have seen examples where people bought technology to solve a problem, but technology on its own can’t solve the problem,’ he said.
‘It has to complement the approach to wealth management. For example, this could be risk profiling software. The FSA has said a risk profiling tool does not provide an answer, but forms part of the process. It may come out with an answer, but this should be discussed with the client and validated.’
For firms grappling with the suitability review, he believes the FSA is looking for a ‘culture of suitability’ coming down the organisation, with buy-in at the most senior level.
‘There has to be clear lines of suitability coming down and management information coming up,’ Hupe added.
From his visits to companies, he has seen instances of firms revisiting and rewriting procedures, reviewing their entire client bank with efforts made to address any gaps or anomalies.