Recent Financial Conduct Authority (FCA) visits to firms suggest suitability is the focus of renewed attention.
According to industry insiders, the issue appears to have moved forward, with a bigger focus on stockbrokers. Wealth Manager understands one national wealth manager has had ‘arrow’ (unannounced and targeted) visits by the FCA, looking into files dating back a decade.
A source at the firm explained it had ‘pushed on’ in terms of suitability with a client review 15 months ago, but acknowledged it was having to fact-find in more detail than it ever has.
‘Because we’re an equity stockbroker, our risk profiles must include equities. It seems there is an assumption by the regulator that we’ve pushed people over the last 100 years to have equities when they didn’t need to, [so] from our point of view it’s all about provability,’ the source said.
Technically, however, firms are only required to keep files for six years.
‘It also means we’re covering our backsides going forward. I don’t think it’s going to make the client’s life or the outcomes any better, but it is going to prove what we did was suitable,’ the source added.
As a result, changes have been made to compliance procedures. ‘The firm has gone where they think the bar will be in two years’ time. The regulator is more comfortable with the centralised processes because they can see how things can be controlled.’
The group anticipates another visit from the FCA, while some older wealth managers could see closer supervision.
Michael Lally, director at Thesis Asset Management’s, said centralisation of processes and more in-depth documentation is a ‘particular problem’ for large regional stockbrokers.
‘In most cases each office operates almost as a separate profit centre, with no central discipline but it doesn’t make them the bad boy,’ he said. ‘You’d imagine they would be a soft target [for the FCA]. It’s the clipboard mentality of the regulator.’
This idea is shared by New City Initiative chairman Magnus Spence, who said he knew of other firms that have had visits over the last year. ‘The FCA are much more targeted, or much more aggressive in the way they are looking for things, I have heard,’ he added.
Managers and consultants agree the FCA is taking issue with processes, controls and monitoring. To Lally, this confirms the FCA’s focus on treating customers fairly (TCF) and proving suitability.
David Middleton, head of client proposition at Towry, agreed. He said recent discussions with the FCA highlighted ‘inducements, remuneration and incentives, culture and controls’ as areas that could work against the delivery of good consumer outcomes.
However, Karen Bond, consultant at Walbrook Partners, said the FCA’s attitude ‘hasn’t changed towards suitability’. She anticipates the FCA will visit firms that cannot prove sustainability or where they have found instances of portfolios not being suitable.
Lally, who said Thesis has not recently received a visit by the FCA, believes ‘annual reviews’ could become the norm. ‘Historically, discretionary managers have never really done that.’
Ian Porter, head of wealth management at Sanlam Private Investments UK, said the FCA has visited the firm in the last year, alongside a separate risk conduct meeting.
‘For the FCA, you should be able to self-identify issues in your business and take action to sort those issues out,’ he said. Sanlam recently retrained its investment managers around attitude to risk questionnaires and scoring. Porter said the FCA ‘made it clear that they will be looking at stuff around mergers and acquisitions’.
The source from a national wealth manager added: ‘We are at risk of the FCA considering investment managers to be tax and financial advisers. I think the FCA is going to expect us to have a holistic financial advice and I’m concerned that makes us a specialist.’
There is also a general consensus the FCA will issue more fines.
Lally said: ‘The FCA is working on the basis that they are making examples of people at the moment – the unlucky ones will be hit by excessive fines to send a message to everybody else.’