Dear CEO letter sparks warning about quality of WM services

Damning findings by UK industry regulator the Financial Services Authority into the quality of investment recommendations made by wealth managers have led to warnings that businesses operating in this space need to improve their performance or face tough consequences.

The poor results of the research into service levels resulted in a so-called ‘Dear CEO’ letter sent to 260 wealth management firms by Margaret Cole, managing director, Conduct Business Unit at the FSA.

The letter notes serious failings, particularly with regard to suitability of investments, as recommended by wealth managers for their clients.

The findings noted in the letter include:

  – 14 out of 16 firms were judged to pose a high or medium-high risk of detriment to their customers, based on the number of client files which had a high risk of unsuitability or where the suitability could not be determined.

   – Overall, 79% of files reviewed had a high risk of unsuitability or the suitability could not be determined.

   – 67% of the files reviewed were not consistent with one or more of the following: the firm’s house models; the client’s documented attitude to risk; and the client’s investment objectives.

Recipients of the letter have until 9 August to respond to the FSA that they have received and understood its content.

“In order to satisfy yourself that you are currently meeting our suitability requirements and to mitigate the risk of future non-compliance, we expect that you will want to consider the client information contained in your client files and if it is likely to satisfy your obligations regarding customers’ desired investment portfolios,” the letter states.

It added: “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 in the year ahead.”

Responding to the publication of the letter Philip Naughton, managing consultant, The IMS Group (IMS) said it clearly indicated the importance the FSA attached to the issue of suitability and that regulated firms should expect continued activity on this front.

“It was clearly disappointing to learn that such a high percentage of the firms reviewed by the FSA are not providing the level of service that customers expect and deserve. Wealth management firms should conduct a ‘health check’ of their client portfolios, files and associated processes as spelled out in the letter.

“With the regulator’s Retail Distribution Review building momentum towards the December 2012 deadline, tough talk about intensive supervision and early product intervention in the Retail Conduct Risk outlook, the FSA looks set to keep its promise to “take decisive action” to protect consumers.

“For wealth management firms who feel like they are struggling under the burden of compliance and regulation; things are only going to get tougher, and it is important for them to establish a healthy compliance culture within the firm.”

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