How to prepare for a Suitability audit

If you have been contacted by the Financial Conduct Authority (FCA) regarding a Suitability audit, this article should help you prepare for it. The FCA will be reviewing your firm’s processes relating to the due diligence (including research) undertaken to ensure that customers are sold suitable products and services. This will include (but is not necessarily limited to) the way in which firms filter products/funds/ services and ensure that they understand the features and associated products and services they recommend. This is seen as key to the provision of good advice.   If past reviews are anything to go by, there will be two stages to the assessment:

  • Review of pre-visit information (see below)
  • A one-day on-site visit – following the pre-visit information the firm will be visited and key individuals interviewed.

The purpose is to understand how the firm approaches due diligence, including research, for the products and services recommended.

Pre-Visit Information

Background Information

  1. Business model and investment proposition
    1. Provide a copy of the new business register covering all advisory business from 1 January to 31 December
    2. The information must include:
      1. The products/services recommended;
      2. The provider of the products/services;
      3. Whether the recommendation was for a platform solution (and if so the platform name); and
      4. The amount invested
  2. Confirm whether the firm operates as “independent” or “restricted”
    1. If operating as independent, but with a “narrower relevant market” (for example, ethical investing) confirm what the narrower relevant market is
    2. If “restricted” the precise nature of the restriction
  3. Which of the following investment propositions are followed?
    1. Panels/buy lists
    2. Multi-manager funds
    3. Model portfolios, internal, constructed and run by the firm
    4. Model portfolios, external, constructed and run by a third party firm
    5. DFM (referring to external DFM)
    6. DFM (in-house management)
    7. Other – specify
  4. Does the firm have a defined client bank/target market. For example, do you target clients:
    1. With a certain level of assets
    2. With a certain level of income
    3. At a certain life stage
    4. Of a certain profession that fit any other particular criteria
  5. Provide a summary of how and why the decision was made to target the client categories chosen
    1. Information on the approach to conducting due diligence
  6. Describe current research and due diligence on the products and services that are recommended. This should include:
    1. The steps taken
    2. Any tools (research) or third parties (consultancy, research firms) and the output from these
    3. The criteria applied in selecting/excluding certain products and services
    4. Additional research on shortlisted products and services; and
    5. Any additional research on shortlisted providers
  7. When answering 6, make sure you include how this process is carried out in relation to the following):
    1. Collective investment schemes (limited to UTs, OEICs, investment trusts and ETFs)
    2. Income drawdown products
    3. Platforms (including both fund supermarkets and wrap platforms)
    4. DFMs (i.e. if you refer to DFMs for investment management)
    5. NB If you do not recommend any of these products/services, confirm this.
  8. Who in the firm is involved in the due diligence process? If multiple individuals, highlight each individual and their role)
  9. Confirm whether there is a process for reviewing research and due diligence over time. If so, provide a summary of the nature of that process including what it involves and when it is undertaken.
  10. Confirm whether any changes in approach to research and due diligence have been implemented over the past two years. If so, what have those changes been, and what was the catalyst for the change

FCA to Audit a years’ worth of firms’ advice

The FT Adviser reports that the Financial Conduct Authority has sent letters to 700 adviser firms requesting evidence of all of the financial advice they gave between 1 January 2015 and 31 December 2015 as part of the FCA’s suitability review.

Firms selected from a “statistically representative sample” of the market are to provide the regulator with records of all personal recommendations by 3 May this year with independent advisers required to provide investment rebalancing details as well. From the information supplied, the FCA will decide which files the firms will have to submit for review. File reviews are expected to centre on assessing suitability, including the way firms document their investment and research processes.

We are not surprised. It all started a long time ago but started coming to a head in 2011 with the ‘Dear CEO’ letter highlighting the regulator’s concerns about investment advice suitability. Recent events have resulted in Suitability shooting to the top of the FCA’s priority list:

  • TR15-12 and TR16-01 expressed the regulator’s increasing frustration that firms that do not appear to have heeded their messages to date.
  • In December 2015, the FCA published the results of their thematic review of 150 files from 15 firms:
    • a third fell substantially short of their expected standards
    • a third need to make some improvements to meet their standards
    • a third raised no substantial concerns
    • failings at five of the firms were so severe they may now be the subject of enforcement investigations
  • In February, the National Audit Office threw down the gauntlet when they published a report on how ineffective the FCA is in dealing with, and preventing, misselling. The NAO’s recommendations are a clear rebuke saying the FCA should
    • “develop further its strategic view of the risks of misselling and its approach to tackling them
    • “communicate its expectations with regard to misselling clearly and consistently to firms…”
    • The report concludes with a summary highlighting that the misselling of financial products causes serious harm – not just to individuals but also to the financial stability of the UK.
  • Peter Hamilton (a barrister specialising in financial services at 4 Pump Court and co-founder of assesses the NAO’s report saying “The really depressing aspect of this report is that it shows yet again how ineffective the FCA is and the FSA was before it. The hundreds of thousands of words written in the many reports about the regulatory failings since 2001 seem to have brought about no fundamental change in the performance of the regulator of the conduct of financial services firms. Indeed, it cannot answer the simple question the NAO asked: does it deal with misselling cost-effectively?”
  • To ignore the NAO’s challenge would be to agree with their damning assessment. In response, on 5 April 2016, the FCA published its 2016/17 business plan with an emphasis on the suitability of advice.
  • And today (19 April 2016), the FCA initiated its advice suitability audit.

Clarke Willmott solicitor Laura Hazell says “A lot of firms are going to be quite shocked, and even if they have done nothing wrong, it’s bound to make some of them nervous.”

We have been watching and listening to the regulator for years and our opinion is that the FCA is going to evoke more than nerves in 2016/17. We suspect they have run out of patience and are not only in a mood to take action but are obliged to do so in order to retain credibility after the NAO’s damning report.