The FCA has published a report on the findings from its thematic review on the conflicts of interest arising from wealth management and private banking firms’ use of in-house investment products (IHPs) in retail discretionary and advisory investment portfolios.
The thematic review follows the FCA’s earlier work on suitability in the wealth management and private banking sector, with the aim of understanding how firms identified and managed conflicts of interest in relation to IHPs.
The thematic review was based on a sample of 18 wealth management and private banking firms which had a total of £146 billion of retail customers’ assets under management through discretionary and advisory services.
Generally, the FCA found that firms recognised the potential risks from conflicts of interest to their customers, their reputation and market integrity. In particular, the FCA was pleased to observe that:
- there was heightened focus by senior management within firms on conflicts of interest in relation to IHPs and they had taken steps to identify and manage weaknesses in their controls;
- it found no evidence of remuneration structures that could have biased investment decisions unfairly towards IHPs; and
- due diligence processes in selecting investment products and monitoring their subsequent performance appeared to be consistent between IHPs and third party products.
However, the FCA did observe shortcomings and lack of consistency in several areas, particularly:
- firms did not articulate clearly enough how IHPs fitted within their business model and strategy, and were aligned with customers’ interests;
- not all firms monitor the level of IHPs in customer portfolios, which could help to indicate how effectively they are managing conflicts; and
- communications with customers were not always clear about the nature of the firm’s services and the extent to which IHPs might feature in customer portfolios.
The FCA will be giving individual feedback to the firms that they looked at in detail and will expect them to address any issues raised with them. Other firms that were not involved in the thematic review, which have access to IHPs, are expected to consider how their own arrangements meet the standards as set out in the report.
In view of the generally positive findings in the thematic review, the FCA is not proposing to undertake further thematic work within the wealth management and private banking sector on conflicts of interest in relation to IHPs.
View FCA Thematic Review 14/19 Wealth management firms and private banks: Conflicts of interest: in-house investment products, 24 November 2014
