Regulation  

FCA investment suitability review: The major failings

FCA investment suitability review: The major failings

Many parts of the wealth management industry are still falling substantially short of expectations over the suitability of their investment portfolios, an FCA thematic review has suggested.

The findings of the study, conducted this summer, indicated some firms have failed to improve practices despite the regulator’s close scrutiny of the subject in recent years.

The FCA’s predecessor, the FCA, had previously undertaken a similar review in 2010, issued a ‘Dear CEO’ letter in 2011, and introduced further work in 2012.

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But while the results of the latest review showed “some improvement”, the FCA said it also found a “wide variation” in practices among the 15 firms sampled. Of these, a third fell “substantially” short of expected standards, while a further third were required to make some improvements.

Having analysed 150 customer files, the regulator said 23 per cent showed a high risk of unsuitability, with a further 37 per cent “unclear” (presenting insufficient or confusing information) and 41 per cent showing a low risk.

This meant the proportion of high risk or unclear files fell from 79 per cent in 2010 to 59 per cent. But the regulator said it was considering enforcement actions against the five firms who fell substantially short of required standards.

Among the main issues raised by the review was the fact that many customer files “did not seem to match customers’ knowledge and experience, financial situation, risk profile and investment objectives”.

“This inconsistency was a significant factor in many of the assessments in which we judged that customer portfolios had a high risk of being unsuitable, or where we were unable to determine whether the portfolio was suitable,” the FCA said.

A failure to update customer information, investment allocations that did not match a customer’s expectations of or attitude to risk, a lack of rationale for these allocations, a lack of explanation for the way in which portfolios were diversified, and investment managers’ risk categorisations which conflicted with the firm’s risk profiling were among the major issues, according to the regulator.

The review also flagged an inadequate disclosure of fees and charges at a number of firms. Some company’s periodic reports did not aggregate transaction charges, for example, according to the FCA. Similarly, other periodic reports failed to ensure investment performance was easily comparable against a benchmark.

Risk appetite failings were again flagged by the regulator in its examples of poor practice. It noted in particular: “One firm had elderly customers, including one over 90 years’ old, who were documented as having a medium risk appetite and 20-year investment horizon.”

“The firm did not appear to have sense checked this information. These customers’ investment portfolios consisted mainly of direct holdings in equities, which may not have been suitable.”