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FCA action to tackle poor due diligence

This article is part of
Guide to due diligence

FCA action to tackle poor due diligence

During the recent thematic review, the Financial Conduct Authority assessed 13 advice firms of different sizes and with a variety of propositions.

The FCA told three firms to make improvements in their research and due diligence process, and asked them to make an attestation they have done so, signed by a senior individual.

Attestations are a supervisory tool used to ensure clear accountability and a focus from senior management on putting things right in regulated firms.

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When the FCA requests an attestation, it does so to gain personal commitment from an approved person at a regulated firm specific action has been taken or will be taken.

According to the FCA the aim of an attestation is to ensure there is clear accountability and a focus from senior management on those specific issues where the regulator would like to see change within firms, often without ongoing regulatory involvement.

Attestations are typically used where emerging risks at firms are unlikely to result in material harm to consumers or a negative impact on market integrity.

Following further work, the regulator also told one firm to complete a past business review.

David Heffron, head of financial services regulation at Pinsent Masons, says other regulatory action, which could be taken to tackle poor due diligence may include an associated redress exercise (if customers have suffered detriment); a private warning; public censure; or a fine.

Generally speaking, Mr Heffron says the FCA will give credit to firms who self-identify and self-report issues, so it is better for firms to conduct their own investigations into their due diligence and research processes and to come up with their own solutions to any problems that are identified.

Mr Heffron says the thematic review shows there are issues that need to be addressed in this area, and therefore firms should be alert to the possibility of further regulatory action in this area.

Ben Wright, head of technical services and research for Tenet, says the action taken by the regulator will ultimately depend on the nature of the due diligence shortcomings it uncovers.

As a minimum, Mr Wright says advisers need to grasp the FCA is likely to require you to take appropriate steps to improve your due diligence.

If there is widespread evidence of poor consumer outcomes, Mr Wright says advisers should brace themselves for a past business review.

He says: “The firm ought to look at whether the recommendation was suitable and redress each client individually.”

Keith Richards, chief executive of the Personal Finance Society, says advisers should also be aware that Mifid II is bringing in new requirements for more detailed research for advice firms but details are still to be confirmed.