The financial services sector will be all too familiar with the workings of The Financial Conduct Authority (FCA). It is a controversial, all-be-it necessary independent regulatory body, put in place to protect consumers and prevent malpractice within financial services. All financial advice firms must be authorised by the FCA to carry out regulated financial service activities.
Because the FCA is funded by the very sector that it regulates, it is perhaps understandable that certain expensive decisions, relating to how the funding is being spent, have been put into question by the advice firms that are footing the bill.
Last week the FCA kick started the first of its 2016 series of thematic reviews for 2016. These reviews are said to form an integral part of the regulators “supervisory approach” to the financial services sector. The outcomes and findings of each, I’m sure will go on to deliver varying degrees of use to the sector itself. This particular review will take a detailed look at the research and due diligence carried out by advisory firms on the products and services that they recommend to clients. It will ultimately find out how advisers make sure that they are recommending the most appropriate solutions to clients.
The negative connotations and mis-selling scandals associated to commission based product recommendations have led to a nationwide ban on providing financial advice in this way. Surely, this means that there can be no excuse for an advice firm to not be recommending the best possible outcomes for clients?
Advisers must have complete confidence in the products and services they provide and should always ask themselves the question, would I recommend this to members of my immediate family? If the answer is negative, then it most certainly won’t be right. Advice firms need to ensure that the best interests of their clients are the central function to the business and the highest standards for research and due diligence should follow naturally.
Unfortunately, the results of this particular FCA thematic review have shown that many firms have not demonstrated a constantly high standard of due diligence across all products and services. Good practice for due diligence needs to be at the core of any advice firm and the key to getting it right is to ensure advisers have the highest level of understanding of each and every product that they are dealing with. Firms should certainly use their own independent software to assess the associated risk, which will ensure that the assessments are constant. And when dealing with clients with more complicated circumstances, the process for carrying out that due diligence, should also increase in thoroughness.
Although the results of this particular thematic review on due diligence will have undoubtedly paved the way for further scrutiny in this area, advice firms should, at this point of the regulation game, be confident that their processes relating to due diligence is top notch.