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Suitability conundrum: what if discretionaries are accountable?

by Danielle Levy on Feb 08, 2012 at 00:01

Suitability conundrum: what if discretionaries are accountable?

As more advisers outsource their investment management, questions are being raised over where responsibility for suitability lies in the relationship.

The issue has been complicated by the formation of different variants of relationships between advisers and discretionaries, which range from bespoke portfolio management to model portfolio solutions held on platforms.

It has also been thrown into the spotlight as the FSA’s suitability review in the wealth management sector continues.

As firms review their internal processes, files and systems, some wealth managers and regulatory consultants suspect there could be growing pressure on discretionary managers to take responsibility for suitability if they are running bespoke mandates for advisers.

Jamie Shepperd, CEO of wealth manager Courtiers, recently attended an FSA-run seminar. ‘It was clearly explained that responsibility lies with both parties.

If you are providing a model on a platform, then that is completely different, but if you have got a relationship with an IFA practice and you are their designated discretionary manager, you need to know what the client’s attitude to risk is and what their objectives are,’ he said.

This is important to bear in mind in the case of client complaints. ‘If a complaint comes, the client will turn against the person with the deepest pockets,’ he added, implying the discretionary management firm could be liable.

When Courtiers works with advisers it asks them to use its fact-find and risk analysis tool. Although it does not seek direct contact with the underlying client, the firm will write the suitability letter and report in the same way it would for a direct client.

Mike Browning, a regulatory consultant at Browning Treasury, also believes discretionaries should take responsibility for suitability, unless they are providing model portfolios on platforms. ‘If you are running a discretionary portfolio, I don’t see how you can avoid doing suitability,’ he said. ‘If you are at a company with an advisory arm you can manage this more effectively and efficiently.’

A source close to the FSA described suitability as a ‘grey area’, but was under the impression that responsibility for suitability falling to discretionary managers for bespoke mandates had been the ‘direction of travel’ at the regulator for some time. ‘This direction of travel flies in the face of where discretionary managers thought they were in the past,’ he added, referring to rule 2.4 of the FSA’s Conduct of Business sourcebook.

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1 comment so far. Why not have your say?

Compliance Officer

Feb 08, 2012 at 10:15

The premise of the article is flawed:

"As more advisers outsource their investment management"

Advisers cannot outsource investment management unless they have authority to manage investments themselves. They can introduce clients to DFMs and they can work in partnership with them but from a pure regulatory sense the clients are just as much those of the DFM as they are of the adviser.

The responsibilities for suitability therefore does fall on the DFM but the practicalities and flexibilities of the "partnership" are important.

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