Need to know: getting insider lists right

According to our survey of wealth management firms, about a third of them do not have a regular client file reviews programme in place to check that they can consistently evidence suitability.

Suitability continues to be the number one conduct risk for most UK wealth management businesses. A lot has been written about the evidence you need on a client file to demonstrate that clients’ investment portfolios are suitable from the outset, and remain suitable over time. But rather less has been written about the governance and controls that wealth management businesses use to check that the selected investment service and strategy is suitable for clients, and that portfolios are being managed in line with the mandate given by the client. So we decided to conduct a survey about suitability controls and governance

Our survey

Our survey focused on wealth management services such as discretionary and advisory portfolio management, rather than financial planning, and a total of 30 firms responded. Between them, they hold assets under management of over £200bn and employ over 600 investment managers, representing a significant proportion of the UK wealth management industry.

We asked firms about the controls they have in the first line, for instance embedded in the front office, and the second line, like the compliance function. The survey also asked respondents questions around the following areas:

  • first line client file reviews for suitability
  • second-line compliance function suitability monitoring
  • first line and second line client file suitability checks
  • effectiveness of their KYC (Know Your Customer) refresh process
  • consequences for staff who consistently fail first and / or second line suitability checks
  • who has ultimate responsibility for suitability in your firm.

Key findings from our suitability survey

Analysis of the responses shows there is work to be done:

  • A significant number of small and medium sized firms don’t appear to be reviewing enough client files to evidence consistent suitability standards
  • Some firms have not yet grasped the nettle of directly linking suitability standards to adviser / IM remuneration and incentives
  • Many firms are not yet confident that their periodic KYC refresh process is consistently effective in evidencing ongoing suitability
  • As SMCR looms on the horizon for investment firms, many of them need to agree an answer to the question of which individual should own suitability in the firm.

Click here for a copy of the full report.

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