The Financial Conduct Authority is set to launch a new thematic review on due diligence for retail investment advice later this year, as this underpins “a lot of the incidences of crystallised risk” it has seen.
The review was mentioned in the FCA’s corporate business plan for 2014/2015, but speaking at the FE Investment Summit yesterday afternoon (30 September), Rory Percival, technical specialist at the FCA, went into further detail.
He told delegates: “We are planning to undertake a thematic project on the subject, kicking off later this year, so it will be well into next year before we have any conclusions on this.
“We are looking at due diligence because when we undertook an exercise a little while ago to look at what are the route causes of unsuitable advice, of all the cases we have looked at over the last four or five years pretty much 100 per cent of unsuitable cases came back with one of three answers; inadequate due diligence was one of those.”
Mr Percival continued: “Due diligence, or at least inadequate due diligence, underpins a lot of the incidences of crystallised risk we’ve seen...Keydata, Arch Cru...so it is a key important area.”
He explained that there were a few key points that could be outlined at this stage, despite the project still needing to be done.
“Firstly, you can rely on third party providers for factual information but not for opinion. So if, for example, the fund manager or the discretionary manager says this is what our asset allocation is, these are our top ten holdings, this is our OCF, you can take all of that stuff at face value, you don’t have to do anything further.
“But if somebody says this is a low risk fund, you can’t take that at face value; you have to come to your own view on what that risk level is.”
Mr Percival said that the review will focus on both products and services.
For products, he said the focus would be on understanding the key risks and benefits of the product or the fund, “so that you understand what kind of clients its going to be suitable for”.
He added that there were some additional elements for services, concerning how the advisory firm operates, how that service operates and whether that can support the services that an adviser would want to provide for clients including discretionary managers and platforms.
Mr Percival said: “For platforms we would expect an impartial assessment of the options, taking into account the client bank circumstances, and what is it for the services that you want to provide to those clients and which platform or platforms in the market best fit those services and those solutions that you want to deliver to those clients.
“Going through that process, writing it down, doesn’t have to be war and peace - but what your thought processes are has come to the conclusion around your platform that’s a professional approach - that demonstrates a mindset that’s got the client at the heart of the business, your doing the right thing for the client.
“On the other hand simply collecting off the shelf - simple due diligence material which has been provided by the platform providers - that’s an inappropriate tick box mentality and a lack of genuine regard for the client.
“There’s nothing wrong with those documents - they are a useful way of finding out information - but they are not the be all and end all of due diligence that you should be undertaking for your firm, for your clients.”
