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Tracking suitability: what assumptions should you make on old business?

Tracking suitability: what assumptions should you make on old business?

The news that Coutts’ suitability review is to go back to 1957 begs the question of what assumptions can be made on advice given in another era.

For industry veteran Gary Reynolds, asking firms to look back at their records as far as back the 1960s ‘would be like going to 1915 and prosecuting a company for sex discrimination, while women were still not allowed to vote’.

‘We have to be very careful not to judge our actions of years back, but only [judge] what fell under the law at the time,’ said Reynolds, who co-founded Courtiers in 1982.

He believes this judgment could be based on hindsight, and there is a danger that forcing firms to look back at old books could become a witch hunt. ‘It is perhaps too easy to judge wealth managers and advisers on what they did 20 years ago because we now know all the outcomes.’

The overriding observation is that common sense, rather than historical regulation, should prevail. 

Michael Lally, director at Thesis Asset Management, said: ‘You can’t apply today’s guidelines to investments made 10 years ago, but you can apply common sense to judge whether or not it was suitable to put a 98-year-old lady into a portfolio of shares and lose all that money. Under any circumstances and environment, that would be bad advice.’

Lally believes parts of the industry are ‘putting up a smokescreen’ when using the historical factor as an excuse not to look back. ‘The basic principles were still there. They have existed for a long time and have only been refined each year,’ he stressed.

However, while a portion of the industry is getting to grips with proving suitability, potentially due to inadequate systems and historical processes, Reynolds believes old books are not what the Financial Conduct Authority (FCA) is most interested in.

Instead, he believes the watchdog is finding issues with dormant portfolios where fees have been taken and advice was not given.

Additionally, as far back as 1957, record keeping was neither thorough nor required. This, he said, adds to a difficulty faced by the FCA, as the statutory requirement for record-keeping is only six years.

‘Although that takes us back to 2008 records, which is a good time to take you back to, it also means records could be missing for a few unhappy souls from 2007.’

‘The biggies are the late 1980s, naughty 1990s and the 2000s, where a lot of people were pushed into precipice and insurance bonds with big fat commission cheques of 7% or 8%. But the organisations that keep these sorts of records tend to be banks, not the average broker.’

Gilly Green, wealth management practice leader at Knadel, believes the FCA’s real focus is on reviews and reports made as and when regulations were introduced or modified. ‘Basically, the FCA is asking you: did you go back and review those accounts?’ she said.

So if looking back that far is almost impossible, what should firms be looking at today?

Green proposes firms answer the following questions.

‘What sort of records did you have? Who is still in the company that can give you a verbal download of things? Could it be worth investing in some technology that will interpret words on a paper page and investigate the content?’

In her view, firms have to start looking at obvious red flags, such as rare cases of client portfolios with, for example, ‘£15,000 in stocks directly held, something fashionable 15 years ago and untouched since’.

Red Flags: what firms should be looking for:

Dormant portfolios: Are fees still been taken on them?

Old accounts: When was the latest review done?

Clients with an ongoing service agreement: Can you prove they have been and are being serviced? If not, was there mention of a one-off piece of advice?

Specific investments: Could some holdings give rise to suitability issues in the future?

Matching risk profile questionnaires: Can you trace the evolution of the risk questionnaire, what the questions were and what answers were given? Were the questions in-line with regulation at the time?

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Profile: Kevin Doran's formula for success at AJ Bell

Profile: Kevin Doran's formula for success at AJ Bell

From a degree in theoretical physics to teaching and becoming one of the youngest chief investment officers in the UK, Kevin Doran has certainly had an interesting career.

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