The relationship between providers and those firms engaging directly with the customer is of critical importance to the regulator, whether the provider is an investment firm, insurance company, platform or lender. So much so that in February the FCA published the high-level findings of its thematic review into the research and due diligence processes carried out by advisory firms and what they recommend to retail clients.
The underlying messages from TR16/1 Assessing Suitability: Research and Due Diligence of Products and Services reference previous concerns about suitability, and product and platform selection, suggesting that perhaps the financial services industry has still not fully grasped the true seriousness of the regulator’s expectations in this area. One of the FCA’s main concerns, reflecting its statutory objectives, is that poor-quality research can lead to poor consumer outcomes.
While the level of detail in the report is not what some were hoping for – for example, there is no summary of good and poor practice – there is enough in the compact document to point both providers and distributors in the right direction.
While the forthcoming consultation paper on Mifid II requirements will no doubt provide further clarity, particularly on unbundling dealing commissions, the report makes mention of 10 other previously published documents or regulatory references, suggesting the content within the thematic review is even more important as it clearly could not be delayed until the further clarity around Mifid II requirements become known. This suggests that the FCA believes there is already sufficient information out there for firms to get the picture.
So what are the underlying concerns, challenges and conflicts? Although these issues are focused more at the adviser/distributor level, the expected actions from advisory firms should mean a more robust and challenging environment for providers, particularly concerning reliance on information and most notably the investment risk level and entrusting the provider with the client’s assets.
“The expected actions from advisory firms should mean a more robust and challenging environment for providers”
Platform due diligence seems to be a focus for criticism, with adviser firms being accused of retrofitting their selection or reliance on an “if it isn’t broken don’t fix it” approach, but is this just an issue for advisers? Of the 13 firms assessed as part of the thematic review, four are now having to make an attestation or undertake a past-business review. One must consider therefore whether providers need to ensure that the intermediary firms it engages with operate appropriate due diligence that delivers fair outcomes to its customers.
The previous FSA guide, Responsibilities of Product Providers and Distributors for the Fair Treatment of Customers, makes two appearances in this thematic review, reiterating how relevant this original FSA document is in today’s world; as such, firms would be well advised to revisit it.
Perhaps unsurprisingly, the culture of a firm played a key part in this review and the FCA found that a “good culture” was important to the success of its research and due diligence process. Culture has been a focus for the regulator in recent years and the decision to abandon the culture review in banks caused a few raised eyebrows. Clearly the reference to it here demonstrates it is still on the agenda and how critically important a good culture is to all other parts of a firm’s delivery of good consumer outcomes.
Overlay the references within the thematic review together with the impact of the new Senior Managers Regime and it is clear to see why providers are looking more closely at the interaction they have with third parties not just from an outsourcing perspective.
While many readers will not currently be senior managers or a certificated individuals within the new regime, that responsibility is coming down the track for all firms from 2018.
Senior managers will have prescribed responsibilities set by the regulator and those individuals responsible for distribution, intermediary sales and relationships might just be wanting an extra degree of comfort that the advisers promoting or advising on their products or services are meeting their due diligence obligations.
Simon Collins is managing director of regulatory at Eversheds.