The FCA undertook a thematic review back in 2016 (TR16/1), which set out their findings on the research and due diligence processes carried out by advisory firms on the products and services they recommend to retail clients. This project followed previous thematic work that had exposed instances of consumer harm and shown that the poor quality research and due diligence is one of the three root causes for poor consumer outcomes. Firms were reminded that research and due diligence form part of a wider range of requirements which, together, combine to ensure firms deliver good client outcomes. These include:
- Competence – the advisory firm must ensure its advisers are adequately competent on the subject of the product or service concerned. Advisers are required to be competent in the regulated activities they undertake, such as advising on investments;
- Research and due diligence –the process carried out by the firm to assess (a) the nature of the investment, (b) its risks and benefits, and (c) the provider (to establish whether the advisory firm believes it appropriate to entrust the provider with client assets). Firms need to understand these factors in order to judge whether the solution is suitable;
- Assessing suitability – once advisers are competent in the nature of the investments and understand the individual product or service, they should be able to judge for each client if the solution is suitable.
So here we are, another four years on, in January 2020, (Happy New Year!) and the above aspects remain as relevant as ever. Research and due diligence need robust systems and controls in order to be effective.
For most firms, file reviews are the primary form of control. To be effective, file reviews should involve a genuine assessment of the recommendation rather than simply checking the presence of research and due diligence, regardless of its quality or relevance to the client.
Research and due diligence are separate requirements – and are not the same thing. In short, research is about understanding and evaluating a product or service; due diligence is about checking out specific providers. A product might pass all your research criteria but if it is offered by a questionable provider, it is unlikely to pass the suitability test.
Along with MiFIDII came PROD, which added new requirements for documenting the assessment and ongoing monitoring of recommendations. The core research and due diligence requirements remained effectively unchanged but were upgraded from guidance to rules.