The Financial Services Authority’s (FSA) ongoing suitability review could spell a death knell for traditional stockbroking models, senior industry executives and commentators are warning.
The regulator found 23% of the Ashcourt Rowan portfolios it reviewed, which had been constructed by high net worth subsidiary Savoy Investment Management, showed a ‘high risk of unsuitability’.
Ashcourt chief Jonathan Polin revealed that although disclosed as a fine in the firm’s results, the penalty was actually a section 166, or a skilled persons order, which is linked to regulatory issues previously uncovered at the firm in another 166 issued in 2010.
Polin (pictured) explained: ‘The section 166 revolves around the Savoy Investment Management business. That business was what we may refer to as a more “old fashioned” stockbroking business.
‘The world has moved on and I have taken pretty hard remedial action on that business. It was key for me to clean up that business and we have made significant changes.’
Polin added he expects a stream of section 166 orders are coming, related to legacy and ‘old fashioned’ business models.
More 166s and fines to come
His sentiments were echoed by David Couch, former Rowan Dartington and Arjent chief executive, who expects traditional stockbroking models to come under the spotlight even more beneath the new regulator, due to the historic tendency to give investment managers too much freedom.
In some cases, this was coupled with a lack of strong documentation or processes.
‘I think to a large extent the fine reflects how business used to be done and the fact that this approach to running portfolios is no longer acceptable,’ Couch said.
‘The FSA expects investment managers to have a grip on what they are doing. Firms can no longer say to their investment managers that they can get on with it. One of the challenges of the future is to ensure those investment managers toe the line and this continues to be a challenge.
‘Many investment managers are caught up in the stage where they say, “This is my client. I will run the portfolio as I see fit”. A bit of education needs to go on. I thought the fine was not a surprise. The only surprise was that it has taken so long to get to this point,’ Couch told Wealth Manager.
Another senior director from a large wealth management business suggests the Ashcourt Rowan fine indicates a breakdown in communication between wealth management firms and the regulator.
Perhaps cynically, he suggests the industry could face a growing number of fines as staff from the regulator look to raise their profile ahead of the regulatory reshuffle.
‘One of the problems with the FSA closing down is that a lot of new people want a new job in the new entity and want to get their name up in lights. It is almost an incentive for some of these people in the FSA to get the boot in.
‘They are not making it easy for anyone at the moment, whereas if you look back to the old days, you could speak to the regulator and there was good communication,’ he said.
Have firms taken heed of FSA warnings?
There is no denying there are inherent weaknesses in record keeping and infrastructure at a number of firms, however.
‘Suitability should have been at the forefront of everyone’s minds for a long time, but I think businesses have been lazy or ignored noises made and now they are struggling to catch up, whether it is in record keeping or how they do business.
‘There are some that are behind the curve, and those that are ahead are also finding the expectations placed on their business around suitability quite onerous, as there is now more detail than was ever required before,’ the source added.
Robert Hupe, a consultant at Knadel who has run ‘suitability health checks’ at several companies, suggests the Ashcourt fine indicates that the FSA is ‘putting its money where its mouth is’.
‘They are saying this is at the forefront of their mind and is a real focus for them, and they will be taking action,’ he said.
He disagrees the old fashioned relationship-driven stockbroking model will not survive under the new regulator.
‘The FSA has said a large amount of discretion for individual advisers is not a bad thing but there needs to be controls around that,’ he added.
He also anticipates that a fear of further fines could stall M&A activity in the sector, as firms grow nervous about the legacy issues or lack of know your client (KYC) they may be acquiring.