Regulation  

What research and due diligence must cover

  • Understand the regulator's due diligence requirement.
  • Gain an understanding of how to carry out suitability assessments.
  • Learn ways to check you have carried out proper controls and oversight.
CPD
Approx.30min
What research and due diligence must cover

Advisory firms and discretionary investment managers are facing a conundrum when it comes to suitability and due diligence.  

The regulator has made clear the importance of due diligence as they regard inadequate work in this area is one of the three root causes for poor consumer outcomes along with insufficient risk profiling and consideration of total costs.

However, the Financial Conduct Authority is not prescriptive as to what constitutes good research and due diligence, instead placing its regulatory focus on achieving outcomes that are client centric.

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Essentially this leaves firms themselves to determine how much in the way of due diligence, controls and oversight are necessary to ensure the client’s best interests are achieved.

Although this approach might appear somewhat vague, in TR15/12 the FCA recognises “the wealth management industry contains a variety of firms which have differing business models and service offerings”.

From this we infer the regulator takes this position because of all the different permutations that are possible in the service delivery model, which in turn makes it difficult, on a priori grounds, to be definitive and all encompassing.

Late to the party

It is no surprise that confusion exists. The Retail Distribution Review (RDR) was a catalyst to the further development and use of discretionary investment managers (DIMs).

However, discretionary management was introduced into the review very late in the process meaning that insufficient time and rigour were applied to the effects on the adviser/investment manager relationship.

While the principles of what is being provided are well understood, it is how the different services are structured that plays such an important role in the qualitative due diligence process as it impacts on so many other areas.

No single definition

So, what should research and due diligence cover? No single definition exists to define the full scope and mandate, along with the controls and oversight that should be in place to support good due diligence.

To move the discussion forward, in the Personal Finance Society Good Practice Guide, Diminimis created its own definition. It reads thus:

"The care a reasonable and prudent person (an adviser) should take before entering into an agreement or a transaction with another party.

"Gathering detailed, quality information over and above the general marketing documentation is a fundamental part of the research process, in order to identify anything deemed material in the service or relationship.

"Advisers will be equipped to make an informed decision ensuring all costs, benefits, known and potential risks are analysed and assessed against their pre-defined criteria. This will lead to greater confidence in client outcomes meeting the identified client needs." 

Not a tick box exercise

More than a simple gathering of information or a tick box exercise, due diligence as the regulator understands it requires careful consideration of the issues, clarity of the adviser firm’s requirements and information gathered and assessed in a consistent manner.