'Source of wealth' is key.  Whether dealing with AML or Politically Exposed Persons (PEPs) when on-boarding clients or building a sustainable business model for the future of your firm, the FCA's Wealth Management & Private Banking sector team's message in last week's speech by Robert Taylor could be summarised in those three words – 'source of wealth'.

His stated purpose was "to make certain that boards and senior management are taking a closer look at conduct risk".  He set the scene by talking about 'trust': "I use that phrase 'trust' because I think that's the fundamental issue within the industry. Are we doing enough to earn that trust?" Although fundamental, as the on-going suitability review work has shown, trust is no longer enough as the basis for a relationship with a retail investor client - or intermediaries.  You can't just 'take it on trust' that a client's source of wealth is legitimate or that they are not on a list of customers to whom sanctions apply. As Robert Taylor put it: "firms have to assure themselves that those individuals are not transacting business through their institutions right now".  Trust is a necessary but not sufficient part of any professional relationship.  'Conduct' has been summarised as 'putting the consumer at the heart of your business'.  That applies whether the client relationship is direct or intermediated.

Taylor acknowledged "that there's been a lot of regulatory initiatives that have come about as a result of [the credit crunch] to ensure that consumers are at the heart of your business models. And some may say that it is an additional burden. On one side, that's a cost. But what hasn't been occurring is a real thorough review of how the business models are able to meet the new standards and deliver a very good service to your customers. Again, coming back to the mantra of putting the consumer at the heart of your business model".  The FCA is not only worried about client investment suitability but also the wealth management sector's 'sustainability'.  The Wealth Management & Private Banking supervisors are worried about the "high cost to income ratios" at which firms are operating.  Taylor expressed the concern that "as an industry, we're still trying to do a lot of the same things that we've always done and trying to build distribution capability the way we've always done it without considering the fact that it is a large cost". He notes that the buoyant markets have not improved the high cost ratio and the FCA is therefore worried about firms' sustainability in the event of another downturn.

There is an interesting contrast and apparent contradiction between this message about sustainability and the warnings last summer about profitability as a 'red flag' for potentially poor consumer outcomes in the general insurance sector.  However, the FCA is probably right on both fronts and it is pleasing to see the regulator adopting different approaches depending on the nature and dynamics of particular sectors.

Citing research showing the average client is now over 60, if not 70, the FCA acknowledges that the innovation and technology solutions favoured in other sectors will be harder to implement.  I think firms should focus on trust and professionalism before trying to make 'silver surfers' of their ageing clients.  With the forthcoming thematic review into due diligence on products and services, firms should focus on the basics before answering the call of 'Project Innovate'.  That includes due diligence on clients, due diligence on intermediaries and due diligence on business models to ensure the future 'source of wealth'.  As Taylor put it, the FCA's challenge for firms is "to conduct their own due diligence and ensure that what they are adopting is suitable for their business model and, just as importantly, their clients".