Compliance Blog

Ensuring suitability in financial services: it’s all about the culture

Globe

In February this year, the Financial Conduct Authority released its report on Assessing Suitability: Research and Due Diligence of Products and Services.

The report is the result of the regulator’s thematic review into the research and due diligence processes carried out by advisory firms on the products and services they recommend to retail clients.

The review looked at:
  • How advisers review the market
  • How they ensure that they recommend suitable solutions for retail clients

It focused particularly on identifying: 

  • How firms selected products, funds, platforms and discretionary investment management services
  • How they created panels and centralised investment propositions (CIPs)
  • And how they considered options for individual clients

Why did the FCA carry out a thematic review?

Our recent blog on thematic reviews explains why the regulator carries out reviews and what they entail.

This particular review came about following the FCA’s previous thematic work and research. This had shown that ‘the poor quality of an advisory firm’s research and due diligence’ is one of the three main causes of poor consumer outcomes (the other two being incorrect risk profiling and cost issues).

The FCA defines research and due diligence as:

the process carried out by the firm to assess (a) the nature of the investment, (b) its risks and benefits and (c) the provider (to establish whether they believe it appropriate to entrust the provider with client assets).”

Due diligence is essential in enabling a firm to assess the suitability of a product or solution for a particular client.

What were the findings?

On the whole, the FCA ‘found that firms sought to achieve positive outcomes for their clients when undertaking research and due diligence, and generally firms demonstrated some good practice in this area.’

But this good practice wasn’t always consistent across firms’ products and services. In particular, the regulator expresses disappointment that its previous advice on how firms recommend suitable platforms hadn’t led to better practice in this area.

The right culture is vital

Although the FCA’s report is brief, one theme comes through loud and clear: the importance of the right corporate culture. This is something Money Marketing also noted in their article on the review.

It’s something we’ve noticed in the FCA’s recent announcements, speeches and reports as well.

Increasingly, the regulator is focusing on a cultural ethos of compliance, rather than a checklist approach that overlays compliance onto – potentially less-than-perfect – processes. The regulator’s 2016-17 Business Plan makes clear the importance of cultural compliance and an embedded focus on treating customers fairly. (There’s more on this in our blog summarising the Plan.)

Particularly in relation to this review, the regulator praises a culture where the client’s best interests are at the heart of the process. This will enable clients to choose the best, most fitting solution.

A ‘culture of challenge’ is a phrase used repeatedly in the report. Firms where advisers are encouraged to challenge assumed approaches or solutions are likely to be those that deliver the best results for clients.

Conversely, ‘where there was no culture of challenge within the firm, the research and due diligence process showed weaknesses’.

Firms that ‘retro-fit’ already-decided solutions to a client’s needs or circumstances come in for particular criticism, as you would expect.

How to create a compliance culture that delivers on the FCA’s requirements

Creating a compliant culture is no longer just about the output. The FCA is clearly keen to move towards a culture where firms self-regulate more. One where the regulator’s policing role is reduced in favour of an advisory, supportive one.

In many firms, compliance is a department, rather than a state of mind. And although this can make creating a compliance culture difficult, putting in place the first foundations can be easier than you think. Our blog divulges the five key steps that will help you start to embed a compliance culture within your firm.

Collaborative working between Marketing and Compliance; refining some of the processes where errors can occur via automated workflow systems and making reviews; approvals and archiving financial promotions easy to do.

These are just three of the areas firms might want to look at to make compliance in-built.  You can read more detail on how to do this in our whitepaper, How to embed a compliance culture into your business. It’s free and you can download a copy here.New Call-to-action