The Financial Conduct Authority has never been prescriptive about the exact amount of due diligence needed for an adviser to make a recommendation.
As the regulator has never laid out exactly what firms have to do when carrying out research, Aileen Lynch, head of technical for SimplyBiz, says it is difficult to define what is a “reasonable amount of due diligence”.
Keith Richards, chief executive of the Personal Finance Society (PFS), says the crucial factor for an adviser to make a recommendation is that it must meet the needs of the respective client.
Mr Richards says they must use their professional judgment to ensure they know sufficient information about the product or service to justify that requirement.
To clearly define the relevant parameters, Mr Richards says the PFS’s good practice guide on research and due diligence on discretionary investment managers states: “The care a reasonable and prudent person (adviser firm) should take before entering into an agreement or a transaction with another party (the DIM).
“Gathering detailed, quality information over and above general marketing documentation is a fundamental part of the research process, in order to identify anything deemed material in the service or relationship.
“By using the same due diligence process systematically, advisers will be equipped to make an informed decision ensuring all the costs, benefits, known and potential risks are analysed and assessed against the adviser firm’s pre-defined criteria.
“This will lead to greater confidence in client outcomes meeting the identified client needs.”
Mr Richards says it is unlikely that advisers can rely on provider’s marketing material when carrying out due diligence.
He says: “Getting a marketing spin instead of the requisite detail is not going to be sufficient to identify whether or not something is suitable for a client.
“It is likely the provider wants to focus on the benefits and unique selling points they have to offer, rather than any potential downsides.
“One would not, for example, buy a car after simply having a quick glance through the sales brochure.”
Sheriar Bradbury, managing director of Bradbury Hamilton, says he always takes marketing material with a pinch of salt based on the purpose of the material.
He says: “Our industry has learnt the hard way that if something is too good to be true, it probably is and we continue to pay for this in our Financial Services Compensation Scheme payments.”
David Heffron, head of financial services regulation at Pinsent Masons, says while firms can rely on factual information provided by EEA-regulated firms as part of their research and due diligence process (for example, the asset allocation), they should not rely on the provider’s opinion.
Mr Heffron says firms should therefore not rely on a provider’s assessment of risk.