Thematic Review TR15/12. Wealth management firms and private banks; Suitability of investment portfolios

Transcription

1 Thematic Review TR15/12 Wealth management firms and private banks; Suitability of investment portfolios What guidance for Advisers on oversight arrangements and controls? 1

2 The Thematic Review Wealth management firms and private banks; Suitability of investment portfolios, whilst specifically reporting on the DIM and Private Banking sector, has raised a number of issues the adviser should be aware of. It is not clear, but it can be assumed, the operating framework under review is model A as described in the Diminimis Suitability Matrix, where the client is adopted as a retail client and has a direct relationship with a representative of the DIM. There is no reference to a financial adviser being involved in the service. There are variations in how DIMs structure their services and how these can impact upon the obligations of the adviser. In the Review the FCA recognise The wealth management industry contains a variety of firms which have differing business models, service offerings, client acquisition strategies, delivery channels, corporate objectives and legacies. Se we would not expect them all to have the same oversight arrangements in place. It is the firm s senior management that is responsible for putting oversight arrangements and controls in place that are right for their business needs and ensure good outcomes for their customers (paragraph 3.6, page 8). It is the adviser who selects the DIM(s) to provide services to their clients therefore it would follow it is the adviser who is responsible for ensuring they have the appropriate oversight and controls in place within their business. To learn from the examples of good and poor practice it is important to understand how the different operating frameworks can demonstrate the value an adviser can bring to the exercise (similar to applying the four eyes principle) and the challenges the adviser faces when researching, selecting and monitoring the DIM, especially if they select to take responsibility for monitoring all aspects of the service. The Thematic Review gave examples for good and poor practices under the following headings identifying what the FCA expects to be in place. The following table is based upon the Diminimis Suitability Matrix and the operating frameworks. Thematic Review Lessons for Advisers using the following Operating Frameworks. A B C a) Governance & control environment. Expects robust arrangements, clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks it is or might be exposed to, and internal control Direct Hybrid; Reliance on others Advisers need to cover this in their research and due diligence on their selected DIMs and the specific team they propose to deal with. This should be covered in the initial qualitative DDQ which will give an outline of how the DIM approaches the subject but should be an item for follow up when meeting the shortlist of DIMs. Agent as client This will be specific to the arrangements for the creation of and the running of model portfolios. 2

3 mechanisms. A firm must establish, implement and maintain adequate policies and procedures...to ensure the firm comply with its obligations under the regulatory system. b) Putting oversight arrangement in place. Expects firms to have adequate and effective front line control mechanisms that identify and reduce risk to customers. It is the responsibility of senior management for putting oversight arrangements and controls in place that are right for their business needs. c) Carrying out effective monitoring Expect that, as part of monitoring, a firm should review how the overall portfolio meets the customer s circumstances, risk profile, objectives and expectations. d) Keeping customer information up to date. Expect firms to be able to show the key customer information they use to assess the suitability of the portfolio has been kept up to date. No specific timescales required but must not be manifestly out of date. Suggest 12 to 18 months should be the target. DIM will have to demonstrate this process. Is this consistent across teams within the DIM, across different offices? DIM will have to demonstrate this process. Consistency per team within the DIM? Responsibility of the DIM but how does this tie in with working DIM can rely on the Adviser to provide the client information and conduct the assessment. The interface between adviser and DIM needs to be well monitored with regular communication & training needs identified. ensure the portfolio continues to meet the agreed investment mandate but see d) below as relies upon the adviser to conduct the client reviews. Adviser will conduct the full review and report to the DIM any changes in the client situation that have an impact on the management of the portfolio. Will also confirm no change. DIM is responsible for ensuring the model portfolio meets its articulated objectives. Has no knowledge of the Adviser is responsible for ensuring their oversight arrangements reduce risk to their clients. Adviser is responsible for the ongoing monitoring regarding suitability of the selected portfolio. Adviser responsibility Expect firms to ensure the customer information they gather and record matches the underlying investment portfolio and they are in a position to Four eyes principle working on behalf of the 3

4 demonstrate this. e) Investment objectives Must be clear & not contradictory. f) Risk appetite Must be clear and not contradictory. g) Matching the customer s portfolio with risk appetite Must be clear and not contradictory from client information or internal practices. h) Investment time horizon Must be clear and not contradictory. i) Restrictions on portfolios If applied must be adhered to with appropriate controls in place. Responsibility of the DIM. What systems and controls are in place? Clarity provided by the adviser who has a wider understanding of the client s needs, establishes the objectives and articulates them on the client s behalf. Clarity provided by the adviser who has a wider understanding of the client s needs, establishes the objectives and articulates them on the client s behalf. Having received a comprehensive investment mandate from the adviser the DIM can construct a suitable portfolio for the Adviser will make it clear from the client s financial planning objectives. Adviser will make clear in the investment mandate and will monitor at reviews to ensure adherence. Adviser responsibility. Adviser responsibility when matching client s objectives, KYC requirements, timescales etc with selected portfolio. Adviser responsibility, particularly in respect of selecting the model portfolio. Adviser responsibility to ensure the time horizon of the investment strategy is in line with client s objectives. Adviser responsibility to take into account in selecting the service style and the model (if these are appropriate for a 4

5 j) Capacity for loss * Must be reviewed regularly. k) Portfolio turnover Expect firms to be able to show that the transactions executed within a customer s investment portfolio over a period of time are suitable and have been carried out in the best interests of the customer. A firm should have regard to the customer s agreed investment strategy in determining the frequency of transactions. Expect to see the rationale behind why the trades are made. monitor but would also be part of the review process conducted by the adviser on the DIM. Clarity provided by the adviser who has a wider understanding of the client s needs, establishes the capacity for loss and articulates this on the client s behalf. DIM has responsibility but the Adviser will cover this in their research and DD but will also monitor for conflicts of interest, decision making/rationale for changes and impact on portfolio performance. client who has requested specific restrictions). Adviser responsibility Most model portfolios run on a platform do not incur DIM transaction charges so the portfolio will be monitored for overall performance. However, there is scope for adviser fees to be levied on transactions on some platforms. Transaction charges can create a conflict of interest which needs to be managed. Points f & g are critical as this is where, based upon factual information, the solution needs to incorporate human characteristics that are variable and open to interpretation. Being able to map a clients understanding and expectations by the adviser and the investment manager is a challenge. This requires discussion with the client and a number of tools exist within the industry to help bring structure to this discussion. However, the Regulator has identified a number of issues across various communications in the DIMs/advisers use of tools (risk profiling, asset allocation); 5

6 May be helpful but must be fit for purpose. It is used only in the circumstances, and for the target market, for which it was designed. Users understand how the tool works and any limitations of the outputs it generates; including to what extent the tool will help them meet their regulatory requirements. The customer is able to understand and engage with the process as designed. Conflicting or inconsistent responses need to be addressed. It is the DIM/adviser who takes responsibility for the use of any tool. It is not a tick box exercise Therefore it is imperative there is a good understanding by the adviser of the investment managers approach to investing, portfolio construction and risk management processes to enable the adviser to clearly articulate the processes to the client in order to correctly establish expectations. The new Research and due diligence question sets asks appropriate questions of DIMs to enable advisers to have the relevant information in order to assess and evaluate the responses. This will give guidance to advisers on the oversight and control arrangements that would be suitable for their firm to adopt. Not mentioned in the examples of good and poor practice but raised in the section on Relevant rules, guidance and reference material are the following topics (see document for full list and references); Final notices being clear and not misleading in the services being provided. FCA Handbook; Clients best interest rule; Information disclosure before providing services; Rule on inducements; Assessing suitability; Churning & switching; Conflicts of Interest. *By capacity for loss we (FCA) refer to the customer s ability to absorb falls in the value of their investment. If any loss of capital would have a detrimental effect on their standard of living, this should be taken into account in assessing the risk they are able to take. Disclaimer; The document is designed for clients of Diminimis who understand the various operating frameworks and the resultant obligations an adviser will be responsible for. For further information please contact me at david@diminimis.com 6