Regulation  

What the FCA expects from discretionary managers

  • Describe some of the requests by the regulator regarding advice suitability
  • Explain dangers with vulnerable clients
  • Describe some of the dangers, and necessities with discretionary management
CPD
Approx.30min

In ensuring this, the firm demonstrates that it understands the investments/products they distribute and the nature of their risks. This is a high-level overview that is conducted before any assessment of individual suitability. 

The key focus of PROD is to ensure investments/products are designed for the general needs of the consumer.

Vulnerable persons

Another area to consider regarding suitability is vulnerable persons, as all firms have a responsibility to set out an approach to dealing with vulnerable persons, which should be accounted for in its vulnerable persons policy.

It is important as part of that policy to understand the responsibilities the firm has under its authorisation by the FCA, and to ensure vulnerability is considered when acting on behalf of a client.

There is a danger of a customer falling victim to pressure selling or to be provided with inappropriate products when the firm does not understand the circumstances of the customer.

There is also the danger that customers purchase inappropriate products because they do not understand the features, terms or conditions of the product.

We believe if a firm does not have the expertise to deal with the client due to their personal situation, they should make every attempt to refer them to another firm or third party for the appropriate level of support to be provided.

All the above are considerations for firms that give investment advice, but additional regulatory requirements must be considered for discretionary wealth managers. 

Discretionary management

If a firm operates an advised and discretionary service, they will need to ensure that advice to access their discretionary management service is genuinely in the best interests of the client.

The firm’s discretionary management service may generate greater charges for a client to pay for the greater level of expertise that may be required for that service, but it may also be the case that their service produces greater profit for the firm.  

The firm will need to ensure that all advice to access their discretionary management service is suitable for each and every client, and not because it may generate more profit for their firm.

A firm with discretionary management permissions may have an advantage when it comes down to suitability because of the resources they are potentially able to deploy.

In past reviews the FCA has identified areas of good practice initiated by discretionary management firms. In one example the FCA cited the following instance:

“A medium-sized discretionary management firm identified internal experts in specific subject areas.

"The clear designation of responsibility meant that individuals took responsibility for ensuring they carried out robust research and due diligence for their subject area before feeding their analysis into the firm’s wider research work.