Thematic Review on suitability of investment portfolios points to possible action

Posted on 27 January 2016

Thematic Review on suitability of investment portfolios points to possible action

On 9 December 2015, the FCA published a thematic review concerning suitability of retail investment portfolios provided by wealth management and private banking Firms.  This review followed its previous thematic reviews of suitability in a sample of wealth management Firms carried out in 2010, and which led to the FSA's Dear CEO Letter in 2011.

The aim of the review was to identify the extent to which the wealth management and private banking sector was in a position to demonstrate the suitability of discretionary and advisory investment portfolios managed for retail customers.  The FCA assessed 150 files from 15 Firms.  Whilst it found good practices at a number of Firms, it also uncovered a number of poor practices.  Among the Firms sampled, its finding were broadly that:

  • One third fell substantially short of the FCA's expected standards;
  • One third needed to make some improvements to meet FCA standards; and
  • One third raised no substantial concerns.

As regards the results of the 150 customer files reviewed across all Firms:

  • 34 (23%) indicated a high risk of unsuitability;
  • 55 (37%) were unclear (meaning that there was insufficient information for the FCA to make an assessment, or the information presented was inconsistent or confusing); and
  • 61 (41%) showed a low risk of unsuitability.

At Annex 2 of its document, the FCA set out numerous specific examples of good and poor practice across 11 different areas, ranging from "governance and control environment" to "turnover of portfolios".

The main messages from the FCA's work were:

  • A number of Firms had taken steps to both improve and demonstrate the suitability of customer investment portfolios;
  • Many Firms still had to make substantial improvements in gathering, recording and regularly updating customer information to support the investment portfolios they managed for customers;
  • Firms needed to do more to ensure that the composition of the portfolios they managed truly reflected the investment needs and risk appetite of their customers, especially for those who had a limited capacity for, or desire to expose themselves to the risk of, capital loss; and
  • Firms needed to ensure that their governance, monitoring and assessment arrangements were sufficient to meet their regulatory responsibilities in relation to suitability.

Suitability is a theme that the regulator has been emphasising for some years now, and Firms would be well advised to take heed of the findings of the thematic review, and to study the review carefully.  Indeed, the FCA suggested that Firms may want to benchmark their own performance against the good and poor practices that had been identified.  Firms should also consider the FSA's finalised guidance in March 2011 on "Assessing suitability".

In terms of enforcement action, as followed the 2010 thematic review, it may be that in future we see enforcement action coming specifically out of the Firms reviewed this time around.  In that respect, we note that the FCA said that 6 of the Firms may be required to devise and implement a plan to remedy the shortfalls it had identified, and that 5 Firms may be required to undertake significant remediation programmes to raise standards and ensure that they can consistently demonstrate the suitability of clients' investment portfolios. It was in relation to these latter 5 that the FCA hinted at future enforcement action.  In an industry that manages over 1.8m portfolios for customers in the UK and has over £600bn of their assets under management, the FCA's sample Firm size was relatively small. Depending on how lessons are learned, other Firms may find themselves in the firing line in future.

You can read the review here.