A new report from the U.K. Financial Conduct Authority (FCA) suggests that wealth-management firms need to do a better job of collecting client information and matching clients’ portfolios with their needs to ensure suitability.
The FCA published the results of a review of wealth managers and private banks on Wednesday, which found that although firms in the U.K. have made progress in establishing suitability, “some firms need to make substantial improvements in client information practices as well as ensuring the portfolios they manage truly reflect the needs and risk appetite of their customers.” The FCA says that it will be following up on these issues with these firms.
A previous review of this area carried out in 2010 found an inability to demonstrate suitability due to a lack of adequate know-your-client (KYC) information, inadequate risk profiling, failing to record customers’ financial position and/or their investment knowledge and experience. In addition, the 2010 review found a mismatch between clients’ portfolios and their attitudes to risk, investment objectives and/or investment horizon. That review resulted in further guidance to the industry and regulatory action against some of the firms involved.
The FCA’s latest review says that several firms have taken steps to both improve and demonstrate the suitability of client portfolios. However, it also found that many firms still have to improve their efforts to gather, record, and update customer information regularly. As well, firms need to do more to ensure that the composition of the portfolios they manage truly reflects the investment needs and risk appetite of their customers, and that their governance, monitoring and assessment arrangements are adequate to meet clients’ suitability requirements.
“The U.K. wealth-management industry plays a vital role in delivering financial services. It is positive that a number of firms have taken steps to improve and demonstrate the suitability of their clients’ investment portfolios. We are concerned, however, that some do not appear to have heeded the messages we have put out in recent years, and taken steps to identify and correct problems we’ve previously identified,” says Megan Butler, the FCA’s director of supervision, investment, wholesale and specialists, in a statement.
“Getting suitability right is fundamental to providing a portfolio management service that meets customers’ needs,” she adds.
As a result, the FCA is calling on firms to review these findings; consider whether any of the issues identified apply to their own businesses; and take action where necessary. The report sets out examples of good and poor practices observed in its review.