Suitability processes take centre stage for advisers

The announcement in May from Megan Butler, director of supervision at the FCA, said despite some improvement in the proportion of client files which clearly demonstrated suitable outcomes, it was clear “many firms still need to up their game”.

For wealth managers, suitability is clearly right back at the top of the business agenda. Ms Butler went on to say that “wealth managers should be aware suitability remains one of our main concerns in the sector”.

She also warned the FCA would continue its scrutiny of the sector until firms “can demonstrate they are delivering suitable investment portfolios”.

The message to wealth managers is clear: the FCA sees suitability as “the day job”, not just a regulatory requirement to be ticked off the list.

The onus is on wealth managers to ensure suitability standards when it comes to which investment portfolio they are advising their clients to adopt, and they must ensure these standards are met and evidenced.

Ensuring that an investment proposition is suitable for a particular client, however, is easier said than done

With the regulator vowing to maintain its focus until firms get it right, wealth firms are under increasing pressure to comply, ensuring their client portfolios are properly allocated and monitored at all times.

Increasing focus of the regulator

This latest FCA announcement follows hard on the heels of its thematic review, which was published in December 2015, entitled ‘Wealth management firms and private banks: suitability in investment portfolios’.

Key findings from this review, which covered 150 files from 15 firms, include:

■ Many firms still did not adequately gather, record and update customer information to support the investment portfolios they manage on their behalf.

■ Firms needed to do more to ensure that the composition of portfolios truly reflected the investment needs and risk appetite of their customers.

■ Firms needed to ensure that their governance, monitoring and assessment arrangements were sufficient.

Among the firms sampled in the review, the City watchdog said one third fell substantially short of expectations, with 23 per cent of files reviewed indicating a high risk of unsuitability and a further 37 per cent being “unclear”.

The regulator also cited a number of examples of poor practice, including one firm that had a client who was 84 years old with a 10 year plus investment time horizon. Another file noted a 90-year-old client with a medium risk appetite and a 20-year investment horizon.