FCA issues findings on research and due diligence of products and services

The FCA has published its review TR16/1: Assessing suitability: Research and due diligence of products and services, where it sets out the high level findings of our thematic review of the research and due diligence processes carried out by advisory firms on the products and services they recommend to retail clients.

The regulator considered how they review the market and ensure that they recommend suitable solutions for retail clients. This included, for example, exploring how:

  • firms selected products, funds, platforms and discretionary investment management services
  • created panels and centralised investment propositions (CIPs)
  • considered options for individual clients

The FCA undertook this project as previous thematic work and instances of consumer harm have shown that the poor quality of an advisory firm’s research and due diligence is one of the three root causes for poor consumer outcomes. The other two root causes are incorrect risk profiling and costs, for example, in relation to replacement business (where a client switches an existing investment or sells it and invests the proceeds in a new product under the recommendation of an adviser).

In the main, the FCA found that firms sought to achieve positive outcomes for their clients when undertaking research and due diligence, and generally firms demonstrated some good practice in this area.

However, many firms did not show consistently good practice across all products and services. The poor practice the review identified varied from issues that are easily addressed to those that are more significant.

The regulator states to be disappointed to identify issues relating to platform research and due diligence, particularly having previously published its expectations around this topic.

Following visits to firms during the review, the FCA undertook a range of measures to address the issues found. It instructed three firms to make improvements in their research and due diligence process and has asked them to make an attestation that they have done so, signed by a senior individual. Following further work, the FCA also told one firm to complete a past business review.

The FCA will be publishing a second consultation paper on the implementation of the Markets in Financial Instruments Directive (MiFID II) later this year.

Based on ESMA’s Technical Advice to the Commission of December 2014, it anticipates that this will include requirements in relation to research on products.

The regulator will provide firms with further communications that set out our expectations in this area in further detail, to help them raise standards and adopt good practices as it is considering a range of options for the best way to do this.

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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