TR15/12: Wealth management firms and private banks: suitability of investment portfolios

This report presents the findings from our review of suitability of retail investment portfolios provided by wealth management and private banking firms and includes examples of good and poor practice to help firms better understand the standards expected of them.

Background

The UK wealth management industry plays a vital role in delivering financial services to consumers. Firms in the industry provide a range of services, including financial planning, investment advice, investment management and stockbroking. The industry manages over 1.8 million portfolios for customers in the UK and has over £600 billion of their assets under management.

This review follows our earlier thematic reviews of suitability in a sample of wealth management firms, carried out in 2010, which led to the FSA’s Dear CEO letter in June 2011 and was followed by further work in 2012.

Our previous thematic work identified the following key issues in many firms:

  • an inability to demonstrate suitability, for example because of absence of up-to-date customer information, inadequate risk profiling, or failure to record customers’ financial position and/or their investment knowledge and experience, and
  • a risk of unsuitability due to inconsistencies between portfolios and the customer’s attitude to risk, investment objectives and/or investment horizon

We took regulatory action against some of the firms involved, with a number undertaking substantial back book reviews. Our Dear CEO letter communicated our expectations on suitability standards in the wealth management industry and we stated that there would be continuing and increasing supervisory focus in this area.

TR15/12: Wealth management firms and private banks: suitability in investment portfolios [PDF]

Our findings

Our thematic review has shown that:

  • a number of firms have taken steps to both improve and demonstrate the suitability of customer investment portfolios
  • many firms still have to make substantial improvements in gathering, recording and regularly updating customer information to support the investment portfolios they manage for customers
  • firms need to do more to ensure that the composition of the portfolios they manage truly reflects the investment needs and risk appetite of their customers, especially those who have a limited capacity for, or desire to expose themselves to the risk of, capital loss
  • firms need to ensure that their governance, monitoring and assessment arrangements are sufficient to meet their regulatory responsibilities in relation to suitability

We expect firms to take note of our findings and ensure that they are able to demonstrate how the portfolios they manage are suitable.

Who should read this review?

Our thematic review is relevant to:

  • all firms that provide discretionary and/or portfolio management services to customers
  • firms that provide third party support services, such as compliance services, to these types of firms

Next steps

We expect relevant firms to read our report and consider whether there are any changes that they need to make to ensure they meet their regulatory responsibilities. Firms should also revisit the earlier publication FSA’s finalised guidance (FG11/5): Assessing suitability: Establishing the risk a customers is willing and able to take and making a suitable investment selection.

More information

  • Press release: The FCA sees improvements in suitability at wealth managers, but concerns remain.
  • Dear CEO letter June 2011.
  • Speech July 2013: The FCA’s approach to supervising wealth management and private banking firms.
  • FSA’s finalised guidance (FG11/5): Assessing suitability: Establishing the risk a customers is willing and able to take and making a suitable investment selection, March 2011.
  • MiFID II will be coming into force in the UK and some of its provisions will apply to firms providing portfolio management services to retail customers.