The FCA has published the findings of its thematic review into advisory firms’ research and due diligence processes, including
- how they create centralised investment propositions (CIPs) and
- review products, platforms and funds to select suitable solutions for clients.
The FCA reviewed the processes and procedures of thirteen advisory firms, of a range of sizes.
To give the FCA a clear picture of how the sector approaches research and due diligence as a whole the review also included
- seven external research and due diligence consultancy firms and
- three product and service providers,
What did the FCA find?
In general the FCA found that firms are creating positive outcomes for their clients as a result of their research and due diligence practices. However, many firms were not consistent across all their services and products and some showed little commitment to addressing issues.
Evidence of a corporate culture where ‘challenge’ was welcome proved to be a strong indicator of a firm’s good practice. Where a firm, or individuals, did not challenge the approach to due diligence, poor practices were found, resulting in a weaker corporate culture.
The FCA made a number of further observations:
- The size of a firm does not act as a barrier to carrying out effective research and due diligence;
- The FCA will not dictate specific tools and processes that firms should use, but firms must be able to demonstrate that suitable recommendations are consistently being made as a result of these processes;
- File checking must provide a ‘genuine assessment’ of the recommendation rather than simply checking the presence of research and due diligence;
- Firms which have CIPs must make sure that individual advisers know the risks and benefits of the CIP;
- Structured processes must be put in place, updated and challenged throughout the life of a product or service;
- Firms tended to demonstrate an ‘if it isn’t broken don’t fix it’ attitude to research and due diligence in the selection of platforms.
- The FCA has instructed a number of the firms involved in the review to make improvements to their research and due diligence processes, through the use of attestations.
A consultation paper will be published on the implementation of MiFID II later this year, which is likely to include regulatory obligations in relation to product research.
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