The FCA has published a report which presents the findings from its thematic review of the suitability of retail investment portfolios provided by wealth management and private banking firms. The report also includes examples of good and poor practice to help such firms understand the standards expected of them.

The report follows earlier thematic reviews of suitability in a sample of wealth management firms, carried out in 2010, which led to the FSA’s Dear CEO letter in June 2011 and was followed by further work in 2012. Key issues identified in many firms from this earlier work included:

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

In the report now published the FCA states that many firms still have to make substantial improvements in gathering, recording and regularly updating customer information to support the investment portfolios they manage for customers. Also, some 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, especially those who have a limited capacity for, or desire to expose themselves to the risk of, capital loss. Some firms also need to ensure that their governance, monitoring and assessment arrangements are sufficient to meet their regulatory responsibilities in relation to suitability.

The FCA states that wealth management and private banking firms should study the findings of the report, in particular the examples of good and poor practice so that they can benchmark their own performance against these and consider whether any changes need to be made to ensure that they meet their regulatory responsibilities and that their customers are receiving suitable outcomes.

View TR15/12: Wealth management firms and private banks: suitability of investment portfolios, 9 December 2015