British regulator suspects widespread incompetence among wealth advisers

16 June 2011

A review by the UK’s financial regulator has found “significant and widespread failings” in the advice given by wealth management firms to their clients.

The Financial Services Agency made the discovery when it sampled sixteen firms at random, examining their client portfolios to check whether the investments were suitable for the clients’ needs.

Fourteen of the firms were judged to pose a high or medium-high risk of detriment to their customers, based on the number of client files where investments were potentially unsuitable for the client, says the FSA.

In two out of every three portfolios reviewed, the adviser’s selected investments were in conflict either with the client’s known attitude to risk, or with his investment objectives, or with the firm’s own house models. And, in total, almost 80 per cent of the customer files “had a high risk of unsuitability or the suitability could not be determined”.

The FSA acted immediately against the firms concerned to mitigate the risks. It has not identified them beyond stating that they “provide advisory and/or discretionary investment management services, predominantly to retail clients”, and range from “major international private banks to those which are domestically focused and privately held”.

Although the sample was small, the agency regards the results as sufficiently worrying to warrant general action.

So earlier this week it sent a letter to chief executives of 260 firms in the sector, warning them to review their own client files. Every firm must check whether it can demonstrate that it meets FSA suitability requirements, and report back by 9 August.

“You should be aware that we consider suitability and the ability to demonstrate it a key area of risk in this sector”, said Margaret Cole, Managing Director of the FSA’s Conduct Business Unit, in the letter to chief executives. “Wealth management businesses can expect to see continuing and increasing supervisory focus on these issues in the year ahead.”




FSA (letter to chief executives, PDF file)



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