FCA raises concerns about advisers' platform due diligenc 19 February 2016

FCA raises concerns about advisers' platform due diligence

The Financial Conduct Authority (FCA) has demanded advisers improve their due diligence processes after it found inconsistencies in the way some firms researched the products and services they recommend - especially platforms.

In its latest due diligence review the regulator found advisers were generally able to demonstrate good practice on the work they did to better understand the quality of the products and services they recommend.

But it added many firms did not show consistently good practice across all products and services and there was room for further improvement.

Advisers were failing particularly in their due diligence of platforms where "many firms demonstrated inconsistent and insufficient research and due diligence in the selection of platforms," it said.

The regulator commissioned a past business review at one firm for failings in their due diligence processes and instructed three further firms to make improvements to their processes and make an attestation that they have done so.

However overall, advice firms had the right approach to seeking to achieve positive outcomes for their clients, the regulator said.

Born Out Of Concern

The regulator sent out questionnaires to firms last summer, probing research processes on the products and services they recommend, including outsourced business.

The review was born out of concerns at the regulator about advisers failing to conduct adequate due diligence when investing their clients' money.

It looked at firms' business models and investment propositions as well as their target client base before asking firms about their research and due diligence processes for collective investment schemes, income drawdown products, platforms and discretionary investment managers.

It wanted to know who at the firm was involved in the process, whether firms had a process in place for reviewing research and due diligence over time, and whether they made any changes to their processes in the past two years.

The work was initially meant to start in November 2014 but got delayed. Visits to firms were undertaken last summer and finished in September. They covered all new advisory business written in 2014.

The regulator scrutinised a range of advisory firms, independent and restricted, from a series of different angles.

Director of life insurance and financial advice Linda Woodall said: "Research and due diligence is one of the three pillars of getting advice right, which is why we have returned to this issue. Firms clearly want to get this right and all firms, regardless of size or type, can carry out good research and due diligence.

"However, there are still improvements firms need to make and we'd encourage all firms to look at our findings and ensure that they are challenging themselves to ensure they're delivering quality due diligence for their clients."

The regulator found firms of all sizes and type were able to assess the nature of the investments they recommend, their risks and benefits if they were putting the interests of their clients at the heart of their business.

It found the firms that got research and due diligence right had a good culture of challenge, meaning the firms' staff felt able to question the firm's approach and there were processes in place to allow for this.

This was important to avoid veering towards the status quo, the FCA said.

The FCA expects firms to adequately managing conflicts between their clients' and their own interests.

But it found in some cases the service the firms received from a platform was considered more important than the service received by the client.

In addition, some firms were no longer reviewing platform options available for clients because the firms were content with the service they received from their existing platform provider, it said.

"This is disappointing as the FCA has previously published its expectations on this topic," it added.

The FCA will publish a second consultation paper on the implementation of the Markets in Financial Instruments Directive (MiFID II) later this year, which will include requirements in relation to research on products.

It said it will further communicate its expectations to advice firms, to help them raise standards and adopt good practices, and is considering a range of options on how to do this.


Dangerous Business

A separate investigation into adviser due diligence recently warned it was impossible for advisers to compare charges for the most common outsourced investment options, putting them at risk of allegations of negligent advice.

The report was carried out by CWC Research and consultancy the lang cat in the second half of last year.

It warned disparate fund charging data and reporting shortages on discretionary fund management (DFM) and multi-asset products made it almost impossible for anyone who is not an analyst to compare providers and select the most suitable option for clients.

It followed a report published in the year before, which had painted a similarly gloomy picture, with only slight improvements made across the sector in the 12 months in-between.

The work also pointed to a mis-match of risk rating solutions and risk-rated funds, saying it had found discrepancies between the two in a number of cases.

The regulator had previously warned advisers they cannot rely on risk ratings expressed in numbers to automatically match the number of a risk-rated portfolio, a process it called shoe-horning.

The report also found ratings changed considerably over time and warned advisers could fall foul of the regulator's suitability rules if they fail to ensure both ratings are checked and maintained on an ongoing basis.

The lang cat found few advisers could explain in straightforward terms how the risk rating would be matched to the portfolio and how it would be run over time.

It said it feared advisers would select investment managers based on cost instead.