Adviser due diligence thematic review report short and not to the point

19 February 2016

There's an irony in a report on due diligence being, in effect, just two pages long. The FCA's thematic review report today tells us more by what it doesn't say. What might DD stand for?

Double delay?

The report was delayed last year, presumably by urgent focus on pension reforms.  It now appears to be just an interim report, pending the release of the FCA's next MiFID II consultation paper.  The research and product governance elements of MiFID II (when – and if – it happens) will inevitably have a significant impact.

In the meantime, one has to feel that advisers looking for help and guidance in an increasingly robo world, with FAMR due to report this spring, have been left in the dark – and reliant on enlightenment from Europe.  It gives little confidence to those who would like to see the FCA determining our regulations for our market.

Dumbed down?

The report is carefully linked to rules and previous guidance.  It says the expectations are the same on all firms, large or small, and that – as with everything – culture is key.  It reminds us that firms can rely on each other for factual information but not opinion.

The report notes that, out of 13 sample firms, 3 will have to attest to improvements to their research and due diligence process and one (of the 3 or a fourth) has been told to conduct a past business review.  That suggests a failure rate in this sample – without even looking at any individual files to test the outcomes - of around 25-30%; but no such conclusion has been drawn.

Advisers will have to wait for further detail from further communications and statements of good practice.  Without endorsement of the services offered by the 7 research and DD consultancies mentioned, advisers will feel left to their own devices.  That may be better than confusing them with the sort of guidance issued last year on 'retail investment advice: clarifying the boundaries…'.

DIMs denied?

Early commentary has already noted that vertically integrated firms have been excluded from this review but may be subject to later phases or separate work.  Discretionary investment managers – and the increasingly popular model portfolios they offer – were mentioned in the introduction but not again.  The dynamics of a DIM service (as opposed to a one-off product recommendation) create different challenges for due diligence by advisers - and suitability for both firms.  We will have to wait and see what MiFID II has to say but model portfolios still won't be products.

Platforms centre stage

The report reserves its most significant observations for platforms, noting concerns with platform research and due diligence despite the FCA's expectations having been published in its factsheet and COBS rules.  The FCA found 'inconsistent and insufficient' research and due diligence in selecting platforms due to status quo bias.  Retro-fitting due diligence to justify previous selections is not encouraged.

Platforms – and the technology they use and facilitate – are increasingly important players in the retail investment market.  If advisers can better understand the platforms they recommend and why they are suitable for their clients this report will have achieved something.

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