A Financial Conduct Authority (FCA) thematic review has established that financial advice firms are seeking to achieve positive outcomes for their clients when it comes to undertaking research and due diligence.
The regulator said that firms in the review were generally able to demonstrate some good practice on the work they did to better understand the quality of the products and services they recommend. However, many firms did not show consistently good practice across all products and services and there is room for further improvement.
Linda Woodall, director of life insurance and financial advice at the FCA, said: “Research and due diligence is one of the three pillars of getting advice right, which is why we have returned to this issue. Firms clearly want to get this right and all firms, regardless of size or type, can carry out good research and due diligence.
“However, there are still improvements firms need to make and we’d encourage all firms to look at our findings and ensure that they are challenging themselves to ensure they’re delivering quality due diligence for their clients.”
The FCA said that deliver good outcomes for consumers, financial advisers need to undertake research and due diligence to assess the nature of the investments they recommend, their risks and benefits and to understand whether the product provider is appropriate for the client’s assets. In the review, it was clear that firms of all sizes and type were able to do this if they had the right approach and were putting the interests of their clients at the heart of their business, the regulator said. Without undertaking proper due diligence, firms will find it difficult to judge whether solutions are suitable for their clients.
During its review, the FCA found the firms that got research and due diligence right had a good culture of challenge. Firms’ staff need to feel able to question the firm’s approach and there should be processes in place to allow for this. In firms where this culture is weak there could be a bias towards the status quo, with firms not questioning why they continued to recommend certain products and services.
Firms also need to ensure they are adequately managing conflicts between their clients’ and their own interests. For example, in some cases the review found the service that the firms received from a platform was considered more important than the service received by the client. In addition, some firms were no longer reviewing platform options available for clients because the firms were content with the service they received from their existing platform provider. This is disappointing as the FCA has previously published its expectations on this topic.
The FCA will publish a second consultation paper on the implementation of the Markets in Financial Instruments Directive (MiFID II) later this year. Based on European Securities and Markets Authority’s Technical Advice to the Commission of December 2014, it is anticipated this will include requirements in relation to research on products and services.
The FCA will communicate with firms to set out expectations in this area and help them raise standards and adopt good practices. A range of options are being considering on how best to do this, it added.
