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What is a ‘reasonable amount’ of due diligence?

This article is part of
Guide to due diligence

He says: “Firms should ensure they have a sufficient understanding of a product to be able to come to their own independent assessment of risk, and should ask the provider to supply additional information or training where that seems necessary to understand the product or service adequately.

“Firms need to come to their own assessment of a product’s suitability, having regard to the particular needs of their individual clients.”

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If providers present material as a fact, Richard Nuttall, head of compliance policy at Simplybiz, says an adviser would not be expected to verify it further.

But where the provider includes subjective opinions regarding certain aspects of their products or funds then Mr Nuttall agrees with Mr Heffron that firms should challenge and not rely solely on the information given.

Mr Nuttall says: “This is about ensuring they deliver what they say they will.

“An independent assessment or factual evidence is best obtained. We are not saying providers deliberately set out to mislead but there have been numerous instances in the past where what they identify as the risk is not always played out in practice.

“The FCA has specifically commented firms should not rely on a provider’s assessment of the investment risk level of a product, and highlighted this by referring to the consumer redress scheme which has been set up regarding the Arch Cru funds.”

In March 2009, Arch Cru was suspended by the Financial Services Authority over liquidity concerns following increased redemptions.

On 21 December 2010, the fund’s consolidated net asset value was calculated at £234m, which represented “a significant loss to investors”.

Ben Wright, head of technical services and research for Tenet, agrees you can rely on factual information published by a regulated provider but not solely on opinions and marketing statements.

Mr Wright says: “Be prepared to ask your own further questions of the provider if it is a product you have not recommended before.

“Advisers should use reasonable care and skill to undertake their own assessment of the risks. Arch Cru is a good example of why you should not take a provider’s assessment of risk at face value.”