FCA Hot Topic: Suitability of investment portfolios

In its December Regulation round-up, published yesterday, the FCA set the suitability of investment portfolios as a hot topic. This follows on from the FCA’s recent thematic review (TR15/12) published on 9 December 2015 which found that whilst wealth managers and private banks have made progress in demonstrating the suitability of their clients’ portfolios there is room for improvement.  Specifically, the FCA noted in its thematic review that although there has been some improvement since its earlier work on this area in 2010 (which lead to a Dear CEO letter) and 2012, a third of firms in the sample fell substantially short of its expected standards and a further third of firms need to make improvements to meet the FCA’s standards. 

The FCA set out three areas where improvements need to be made.  These are: 

• gathering, recording and regularly updating customer information to support the investment decisions taken on a customer’s portfolio;
• ensuring that the composition of client’s portfolios truly reflect their investment; and
• ensuring that the governance, monitoring and assessment arrangements are sufficient to meet their regulatory obligations.

Now that the FCA has made the suitability of investment portfolios a hot topic, wealth managers and private banks can expect the FCA to take a keener interest in how firms are determining suitability and whether they are meeting the FCA’s stated expectations.  This will inevitably lead to visits to individual firms and potentially enforcement actions where firms are found to be failing to meet the FCA’s standards. 

Wealth managers and private banks should therefore take this opportunity to review their current practices when determining the suitability of investment portfolios for their customers.  Firms should have the right policies and procedures in place to ensure that portfolio contents are reviewed on a periodic basis in the context of their customers’ objectives, material life events and stated investment time horizons.  Material life events could include, for example, changing geo-political events that impact the customer, impending retirement or changes in family circumstances such as additional family members, divorce and so on.  

Please do not hesitate to contact Richard Small, James Quarmby or your usual Stephenson Harwood contact if you would like to discuss these developments.