Now that we are all well into the swing of 2016, Christmas seems like a distant memory. One thing that many might have missed in the haze of December 2015 partying is the FCA paper TR15/12, concerning the suitability of investment portfolios. Although this paper arose from a thematic review of Wealth Management firms and Private Banks, it undoubtedly contains some valuable lessons and reminders that all adviser firms should consider.

The thematic review followed on the heels of an earlier review of these firms in Autumn 2010, which had identified the following key issues …

• an inability to demonstrate suitability, for example because of absence of up-to-date customer information, inadequate risk profiling, or failure to record customers’ financial position and/or their investment knowledge and experience;
• a risk of unsuitability due to inconsistencies between portfolios and the customer’s attitude to risk, investment objectives and/or investment horizon.

Progress?
What did the FCA find from the follow up review with a sample of firms?

• a third fell substantially short of expected standards;
• a third need to make some improvements to meet standards.

In particular, of the client files that were reviewed, 23% indicated a high risk of unsuitability and a further 37% were unclear. It is unlikely that any adviser will not understand what ‘unsuitable’ means but it will probably be helpful to define what is meant by the term ‘unclear’.

A file is unclear where there is insufficient information to make an assessment of suitability or the information presented is inconsistent or confusing.

The paper suggested that these results demonstrated an improvement from the previous review on suitability, with the proportion of unsuitable or unclear files falling from ‘79% to 59%’ (sic)! However, it is doubtful that many people would consider this ‘improvement’ worthy of breaking out the champagne, when two thirds of firms, and nearly the same proportion of files reviewed, were found wanting.

On a slightly different aspect, the FCA also found issues around what was actually being delivered to clients …

Firms must deliver the services customers have signed up for, agreeing upfront the exact nature of the service they will provide and how the customer will pay for this – ensuring it is recorded in the client agreement signed at the start of the business relationship.

We suggested at the top of this article that, although TR15/12 related to Wealth Managers and Private Banks, it should make valuable (or compulsory!) reading for all firms. We stick by that. ATEB works with a large number of firms, part of that work being to review client files and we also regularly come across most of the failings that the FCA review found.