Advice firms demonstrate some good practice on due diligence but greater consistency needed

Financial advice firms are seeking to achieve positive outcomes for their clients when it comes to undertaking research and due diligence, a thematic review by the Financial Conduct Authority (FCA) has found.

The firms in the review were generally able to demonstrate some good practice on the work they did to better understand the quality of the products and services they recommend. However, many firms did not show consistently good practice across all products and services and there is room for further improvement.

Linda Woodall, director of life insurance and financial advice at the FCA, said:

“Research and due diligence is one of the three pillars of getting advice right, which is why we have returned to this issue. Firms clearly want to get this right and all firms, regardless of size or type, can carry out good research and due diligence.

“However, there are still improvements firms need to make and we’d encourage all firms to look at our findings and ensure that they are challenging themselves to ensure they’re delivering quality due diligence for their clients.”

To deliver good outcomes for consumers, financial advisers need to undertake research and due diligence to assess the nature of the investments they recommend, their risks and benefits and to understand whether the product provider is appropriate for the client’s assets. 

In the review, it was clear that firms of all sizes and type were able to do this if they had the right approach and were putting the interests of their clients at the heart of their business. Without undertaking proper due diligence, firms will find it difficult to judge whether solutions are suitable for their clients.

During its review, the FCA found the firms that got research and due diligence right had a good culture of challenge. Firms’ staff need to feel able to question the firm’s approach and there should be processes in place to allow for this. 

In firms where this culture is weak there could be a bias towards the status quo, with firms not questioning why they continued to recommend certain products and services.

Firms also need to ensure they are adequately managing conflicts between their clients’ and their own interests. For example, in some cases the review found the service that the firms received from a platform was considered more important than the service received by the client. 

In addition, some firms were no longer reviewing platform options available for clients because the firms were content with the service they received from their existing platform provider. This is disappointing as the FCA has previously published its expectations on this topic.

The FCA will publish a second consultation paper on the implementation of the Markets in Financial Instruments Directive (MiFID II) later this year.  Based on European Securities and Markets Authority’s Technical Advice to the Commission of December 2014, it is anticipated this will include requirements in relation to research on products and services.

The FCA will communicate with firms to set out expectations in this area and help them raise standards and adopt good practices. A range of options are being considering on how best to do this.

Notes for editors

  1. TR16/1 Assessing suitability: Research and due diligence of products and services
  2. During the review, the FCA assessed 13 advisory firms of different sizes and with a variety of propositions. Each firm was visited, their processes and procedures for carrying out research and due diligence reviewed and relevant staff were interviewed. We did not carry out any individual file reviews to test outcomes of research and due diligence or test their approach in practice.
  3. While the focus of the review was advisory firms, we also visited seven external research and due diligence consultancy firms and three product or service providers to understand the wider market and their involvement in advisory firms’ approach. We did not carry out an assessment of these firms against our rules.
  4. The relevant regulatory requirements and guidance are:
    1. Principle for business 9: A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
    2. Conduct of Business Rule 9: Assessing suitability
    3. Incorrect risk profiling as outlined in the first ‘Assessing Suitability’ guidance paper
    4. Guidance on costs, for example in relation to replacement business as set out in the second ‘Assessing Suitability’ guidance paper
    5. The Responsibilities of Providers and Distributors for the Fair Treatment of Customers
  5. The FCA’s factsheet detailing considerations for retail investment firms that use platforms.
  6. On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  7. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers. You can find more information about the FCA, as well as how it is different to the PRA.
  8. Find out more information about the FCA.
  9. Read more about how financial advisers should assess suitability.