FSA concerned by poor conduct in private banking and wealth management

The Financial Services Authority (FSA) has highlighted concerns over “poor firm conduct” in private banking and wealth management.

In its Retail Risk Conduct Outlook, the regulator highlighted private banking and wealth management as an “emerging risk”, warning that poor conduct could lead to “widespread detriment”.

The regulator was concerned that increasingly complex products were being sold to clients.

The regulator says it had carried out a thematic review of the wealth management sector, “which revealed evidence of misconduct, giving rise to potential consumer detriment”.

It adds: “In particular, the results indicate that many firms do not gather or maintain adequate client information to demonstrate suitability, and that even where the information is available, there is a significant risk that consumers have unsuitable portfolios.”

The regulator says it has communicated risks through a a ’Dear CEO’ letter and was engaging with regulated firms, consultancies and trade bodies to improve standards.

It adds: “While some firms appear to have taken steps to improve record keeping and suitability, further work is needed to ensure change throughout the industry.” (article continues below)

It warns: “Private banking clients expect to receive a bespoke service and access to a wider range of products, many of which are complex.

“This is exacerbated by the current low interest rate environment, which leads to strong incentives for firms to sell retail investors products that target higher levels of return without adequately understanding or disclosing the risks.”

The regulator adds: “Banks may sell complex or illiquid products that encourage existing private banking clients to take inappropriate risks with their savings. There is a risk that relationship managers with aggressive sales incentives may be more inclined to highlight benefits and downplay risks of the products they sell.

“Banks inappropriately sell wealth management products to Affluent and Mass Affluent consumers, either by up-selling them into private banking or by offering them via their retail banking arm. Poor risk profiling may have already resulted in the up-risking of some retail consumers.”