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Regulator on advice firms’ due diligence processes

This article is part of
Guide to due diligence

Regulator on advice firms’ due diligence processes

Some advice firms are putting the service they get from platforms above the service their clients get when considering products, the Financial Conduct Authority has found.

In its first thematic review of 2016, the regulator looked into the due diligence carried out by financial advice firms.

The FCA found firms which took part in the review were generally able to demonstrate some good practice on due diligence but it found many firms did not show consistently good practice across all products and services.

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Among the issues flagged up in the six-page thematic review was a possibility towards bias. It found in firms where staff feel unable to question the status quo, there could be a bias towards that, with advisers not questioning why they continued to recommend certain products and services.

Linda Woodall, director of life insurance and financial advice at the FCA, said: “Research and due diligence is one of the three pillars of getting advice right, which is why we have returned to this issue.

“Firms clearly want to get this right and all firms, regardless of size or type, can carry out good research and due diligence.

“However, there are still improvements firms need to make and we’d encourage all firms to look at our findings and ensure they are challenging themselves to ensure they’re delivering quality due diligence for their clients.”

In some cases the review found the service the firms received from a platform was considered more important than the service received by the client.

In addition some firms were no longer reviewing platform options available for clients because the firms were content with the service they received from their existing provider.

The FCA said this was “disappointing” since it had already published its expectations on this topic.

The regulator also saw evidence of some firms retro-fitting due diligence to justify the outcome it had already previously decided upon.

The report said: “We saw one firm that only carried out due diligence on its platform selection after being prompted by its compliance consultant.

“When it carried out the due diligence it selected criteria based on platform features that would make its existing platform come out as the preferred option, rather than carrying out an objective assessment.”

Keith Richards, chief executive of the Personal Finance Society, says advisers should view the thematic review document as the start of the process, not the end.

According to Mr Richards: “It is interesting to note that the regulator uses the phrase ‘research and due diligence’ - identifying two inter-related components to the function.”