A journey through space

and suitability Richard Scrivener

June 2014

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Suitability Appropriateness No Obligation

Suitability Appropriateness No Obligation

Suitability in context

A journey through space and…

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Agenda

The past…

The present…

an FCA view

The present…

a Bovill view

The future…

• Between summer 2010 and spring 2011 there

were 16 visits to wealth management firms

• 14 of these had a number of files with

a high risk of unsuitability

• March 2011 Risk Profiling Guidance

• June 2011 Dear CEO letter and attestation

A long time ago…

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the past

Please respond to acknowledge that you have read and understood the

content of this letter and considered the implications for your firm.

…we expect that you will want to consider the client information

contained in your client files…

…sample a meaningful number …

…assess whether they have relevant, meaningful, accurate and up to

date client information …

(assess) …the depth, breadth and quality of client information …

(assess) …whether the client portfolios, and the current holdings … are

suitable, based on the documented client information you hold.

If you identify problems, root causes or compliance failures, we expect

you to have regard to Principle 6 and consider whether you ought to act

… with regard to the position of customers who may have suffered

detriment …

Dear CEO attestation

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the past

• October 2011 – Credit Suisse Final Notice

• Phase 2 – 6 more visits in 2012 to major retail banks

• November 2012 – Savoy Inv Mgmt Final Notice (following Phase 1)

• May 2013 – J P Morgan Int Bank Final Notice (following Phase 1)

• Several S166 reports commissioned

• Shadow 166s and past business reviews

• September 2013 – AXA Wealth Services Final Notice

The aftermath

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the past

• March 2014 – Santander Final Notice (Phase 2)

• £12.4m fine

Aggravating factors included:

Beware the attestation!

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Santander’s failures gave rise to a significant risk of customers being recommended, making and remaining in investments that were not

suitable for them.

Santander’s response to the Dear CEO letter was too positive and misleading in relation to its description of its tools and processes and

the quality of outcomes they produced for customers.

the past

• Rob Taylor – new Head of Wealth Management and Private

Banking key messages:

• Suitability and the associated necessary processes

needs to be “in the DNA of the business”

• There has got to be a management-led cultural shift

• In some of the firms that have been visited, despite

remediation, internal monitoring still highlights that

process hasn’t been embedded in the practices of the

investment managers/relationship managers

• Behavioural change needs to be monitored from the top;

from Board to Exec management through Risk function

to Front Office

• You cannot just throw the problem at Compliance to sort

out

The FCA view

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the present

• Some “stellar jobs” where leadership places appropriate

importance on getting it embedded properly

• A number of firms have not done anything!!

• They are having some “difficult discussions”

The FCA view (cont’d)

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the present

Financial Planning ?

Such information as is necessary for the firm to understand the essential facts about him … giving due consideration to

the nature and extent of the service provided … …where relevant …

1. Information gathering/fact finding

Overlap between financial adviser and investment manager

Bovill view – the challenges

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Investment Management?

Such information as is necessary for the firm to understand the essential facts about him …… giving due consideration to the

nature and extent of the service provided … …where relevant …

the present

1. Information gathering/fact finding

Firms need to decide on their own irreducible minimum level of

information, enshrine it within process, stick to it and enforce it

without exception.

Bovill view – the challenges

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the present

2. Risk Profiling

Demonstrate that you’ve had a risk discussion with the client,

giving examples of what different levels of risk will mean to

them; what returns they could achieve; what losses they might

make.

Bovill view – the challenges

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the present

3. Capacity For Loss

The customer’s ability to absorb falls in the value of their

investment. If any loss of capital would have a materially

detrimental effect on their standard of living, this should be

taken into account in assessing the risk that they are able to

take.

Demonstrate that the client’s ability to absorb loss has been

considered and you are not blindly exposing them to risk

assets when this would clearly be unsuitable.

Bovill view – the challenges

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the present

4. Non-discretionary stocks/cherished holdings

Ensure the client understands who has responsibility for

monitoring – and more importantly, selling any particular asset

in their portfolio.

Bovill view – the challenges

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the present

5. Culture shift

Demonstrating suitability should be second-nature,

like treating customers fairly, why wouldn’t you do it?

Bovill view – the challenges

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the present

• more thematic visits…definitely

• more interventions…almost certainly

• more Final Notices…probably

FCA’s wider agenda:

• conflicts of interest for wealth

managers and private banks

(use of in-house products)

• RDR post-implementation review

On the horizon:

• MiFID 2

The journey continues

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the future

?

Questions

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• We’ve reached the end of the beginning, rather than the

beginning of the end

• Re-visit what you’ve already done to ensure it is

still working

• Ensure you have sufficient information to support the

decisions you’ve made and you can demonstrate why

they are suitable

• Ask yourself if suitability really is in the DNA of your firm.

Suitability – the journey

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