Our friends at OWL comment on Suitability

Posted 26.06.2011

The Suitability Standard

If you have not received the FSA’s Dear CEO letter on its wealth management review, you are either lucky or have an incompetent postman. Those who are not so fortunate would be unwise to ignore the obvious warning implicit in it. Courteous it may be; subtle it is not. FSA is raising its standard; it wants these colours to be visible from coast to coast. And it definitely expects firms to raise their standards too.

However skewed their sample may have been, with findings of 79% failure, the FSA cannot now let up on this suitability campaign. It will soon be showing on a street near you. Note also that it is Margaret Cole who has signed the letter. Read into that what you will.

It would be churlish to ignore the FSA’s invitation to assess the suitability of your client files. Acts of brave defiance are best reserved for another day. And be sure to be ready to explain how you have applied Principle 6 to your findings.

The challenge is to be able to demonstrate compliance; that is going to be the hardest part for many. Note the comment ‘a high risk of unsuitability or the suitability could not be determined’. It is a fair bet that the latter group is by far the larger. And it is worth recognising the added dimension: if investments go belly-up and you cannot demonstrate their suitability, a tricky client may choose to sue.

Although the findings include inconsistencies with client objectives, it is clear that the greater problem is failure to take proper account of clients’ attitude to risk. Inadequate risk management systems get an honourable mention too.

Note also their concern about non-conformity to the ‘house model’. As with all procedures, the easiest charge is failure to stick to the letter of your own law. If the house model is not mandatory, be sure to be clear about that.

Remember that compliance with the letter of the rule is the barest minimum; questioning will quickly revert to a principles basis, focusing largely on skill, care and diligence. But you will also have recognised the letter’s unattributed quote from Principle 3.

The quality of firms’ responses will help FSA to prioritise their further reviews. This is not a time to be glib, unless, of course, you find your supervisor irresistibly attractive.

The FSA invites responses by 9th August.

What needs to be done? What needs to be done by 9th August? What should the letter say? How big is this exercise?

OWL advises and supports the investment industry.

Oliver Lodge

This entry was posted in Compliance, Investors, Markets and Regulations, Risk Reporting. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>