By 9 August, wealth managers must respond to the FSA’s Dear CEO letter to confirm they are currently meeting the FSA’s suitability requirements for client portfolios and mitigating the risk of future non-compliance. If not, firms can expect past business reviews, FSA enforcement action – or both.
The Dear CEO letter was sent on 14 June to all wealth management firms that predominantly service retail clients. It reported that the FSA has conducted a limited review of 16 firms but found 79% of files showed a high risk of unsuitability or suitability could not be determined. This indicates historic mis-selling by wealth management firms and private banks, specifically relating to portfolio suitability. Inevitably, the clients of such firms are likely to be higher net worth and therefore likely to have incurred substantial losses in the recent financial crisis. Does this mean another mis-selling scandal?
The FSA’s letter reminds firms: “If, in the course of reviewing your client files, you identify problems, root causes or compliance failures, we would expect you to have regard to Principle 6 (Customers’ interests) and consider whether you ought to act on your own initiative with regard to the position of customers who may have suffered detriment from, or been potentially disadvantaged by such factors“. I have warned often enough about the unquantifiable exposures that could arise from such root causes.
However, this need not represent the beginning of a mis-selling scandal if firms are able to submit an appropriate response. We have considered possible responses firms could deploy to minimise the extent of their potential liabilities and regulatory exposure. We believe it may be possible for firms to comply with the FSA’s requirements whilst doing little more than their normal periodic client portfolio reviews.
The FSA suggests: “If you have not recently assessed the suitability of your client files, you may want to consider: sampling a meaningful number of client files; assessing whether files have relevant, meaningful, accurate and up-to-date client information; the depth, breadth and quality of client information; and, whether the client portfolios, and the current holdings in client portfolios, are suitable, based on the documented client information you hold“.
Does this not simply describe the normal process of proper periodic client portfolio reviews?