In this report we set out the high level findings of our thematic review of the research and due diligence processes carried out by advisory firms on the products and services they recommend to retail clients.
We considered how they review the market and ensure that they recommend suitable solutions for retail clients. This included, for example, exploring how:
- firms selected products, funds, platforms and discretionary investment management services
- created panels and centralised investment propositions (CIPs)
- considered options for individual clients
Background
We undertook this project as previous thematic work and instances of consumer harm have shown that the poor quality of an advisory firm’s research and due diligence is one of the three root causes for poor consumer outcomes. The other two root causes are incorrect risk profiling and costs, for example, in relation to replacement business (where a client switches an existing investment or sells it and invests the proceeds in a new product under the recommendation of an adviser).
TR16/1: Assessing suitability: Research and due diligence of products and services[1] [PDF]
Our findings
In the main, we found that firms sought to achieve positive outcomes for their clients when undertaking research and due diligence, and generally firms demonstrated some good practice in this area.
However, many firms did not show consistently good practice across all products and services. The poor practice we identified varied from issues that are easily addressed to those that are more significant.
We were disappointed to identify issues relating to platform research and due diligence, particularly having previously published our expectations around this topic.
Next steps
Following visits to firms during our review, we undertook a range of measures to address the issues found. We instructed three firms to make improvements in their research and due diligence process and have asked them to make an attestation that they have done so, signed by a senior individual. Following further work, we have also told one firm we want it to complete a past business review.
We will be publishing a second consultation paper on the implementation of the Markets in Financial Instruments Directive (MiFID II) later this year. Based on ESMA’s Technical Advice to the Commission of December 2014, we anticipate that this will include requirements in relation to research on products.
We will provide firms with further communications that set out our expectations in this area in further detail, to help them raise standards and adopt good practices. We are considering a range of options for the best way to do this.