Suitability - the threat that refuses to go away


Suitability - the threat that refuses to go away

We all know that when faced with a perceived threat, our bodies produce the necessary chemicals that enable us to ‘fight or flight’.  We also know, that there is a third, and slightly less strenuous option available, ‘hide under the covers and hope it goes away’.

It is now nearly 3½ years since the FSA issued its ‘Dear CEO’ letter to Wealth Managers on the topic of Suitability.  A letter that concluded “you should be aware that we consider suitability – and the ability to demonstrate it – a key area of risk in this sector and wealth management businesses can expect to see continuing and increasing supervisory focus on these issues”.

Since that letter we have seen the regulator back up their talk with the issuance of millions of pounds worth of fines, touching all segments of the wealth industry; from high profile private banks to small financial advisers.  

The rhetoric has continued since the birth of the FCA, and many wealth firms claim to have acted to address the issue, so why do we continue to witness fines for suitability failings?  The answer often lies in the fact that there is big difference between a one off review of client files at a point in time, and full commitment to change processes, controls and cultures to ensure the ongoing suitability of investments and advice.  It remains a concern how many firms have failed to truly address their approaches to managing their portfolios over time, to monitor for portfolio drift, and to ensure circumstances haven’t changed and audit trails are maintained. 

This is not a threat that will go away if you wait under the covers long enough.  This is something that needs facing up to, and that means looking into your organisation and answering some important questions.

If the FCA turned up tomorrow, Can you evidence your procedures and controls for gathering client information?, For assessing appetite for risk and capacity for loss?  AND for reviewing it regularly?  Can you show how you select the investments that deliver on a client’s requirements, and how those investments are monitored to ensure continued suitability on day one, one month on, one year or longer?  Can you show how this process is applied across all your clients, all your client-facing staff and all your locations in a consistent manner?  And can you demonstrate that theory is put into practice if a client file is randomly selected, or a member of staff is interviewed, at short notice?

If the answer to any of the above is “no”, then the threat is real and you need to fight not hide.  But that leaves one final thought; if you think that the shot of adrenaline needed to win that fight is simply to purchase a technology tool without any change to your business model, procedures or company culture, then this is fight you might not win.

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Gilly Green

Gilly heads Knadel's Wealth Management practice. Gilly has over 25 years experience in the Wealth Management industry and has both hands-on, practitioner experience working within Wealth Management firms as well as a wide range of change expertise and knowledge, gained during her time as a management consultant.

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