In brief
Written by Senior Regulatory Counsel Michael Mathieson
A small number of Unravelled readers seem to think we can sometimes be a bit hard on ASIC and APRA. True it is that both regulators cop flak from various quarters and that sometimes we make our own modest contribution to the broader assessment of their work. But no publication should ignore its readership (not even a tiny subset of it), and so today, for something different, we train our sights on the Financial Conduct Authority in the UK. What the FCA has said about providing personal advice to retail clients is interesting, debatable and likely to induce a strong sense of déjà vu.
What the regulator says
Late last year, the FCA released a report entitled 'Wealth management firms and private banks – Suitability of investment portfolios'. The following statement caught my eye:
Firms providing discretionary and advisory portfolio management services to retail customers must ensure that… their customer portfolios are suitable.
As did this further statement:
Firms need to embed practices that ensure that they are consistently reviewing and continuing to meet their customers' needs where they have agreed to provide an ongoing service.
From these statements, I inferred that, in the UK, a provider of personal advice to retail clients has a legislative duty to review their clients' portfolios and ensure those portfolios remain suitable where they have agreed to provide an ongoing service. And I thought to myself, there is no equivalent duty under the FoFA provisions in Part 7.7A of the Corporations Act. The ongoing fee arrangement provisions certainly do not go that far.
I was very interested to see what this legislative duty looked like, so I went hunting for it. But it turns out there is no such duty. It turns out the FCA, in making these statements, has, at best, put something of a gloss on the law. (I did mention déjà vu earlier, but I will say no more about it.)
What the law says
So what does the law in fact say? There is a section in the FCA Handbook dealing with 'Assessing suitability' (Conduct of Business Sourcebook, section 9.2). It says that a firm:
must take reasonable steps to ensure that a personal recommendation… is suitable for its client.
A 'personal recommendation' is a recommendation that is advice on investments and is presented as suitable for the person to whom it is made or is based on a consideration of the circumstances of that person.
A number of things can be said about this. The first is that, naturally, care must be taken in looking at a particular rule divorced from the context in which it appears. For example, considering the meaning of the best interests duty under FoFA, without also considering the appropriate advice and conflict/priority duties that sit alongside it, would result in an incomplete assessment.
However, the second thing is that, plainly, the suitability assessment duty does not require a firm to ensure that 'their customer portfolios are suitable'. The duty is not directed at the suitability of an investment portfolio, it is directed at the suitability of a recommendation. The distinction is important. An investment portfolio that was suitable at one point in time may become unsuitable at a later point in time. But the suitability assessment duty does not require a firm to monitor the portfolio or to adjust it so that it remains suitable. The suitability assessment duty requires a personal recommendation to be suitable at the time it is given.
Another limb of the suitability assessment duty requires a firm to obtain relevant information about the client before making a personal recommendation. This requirement echoes some of the steps you must take if you want personal advice you give to be deemed to be in the best interests of the client under FoFA. But the suitability assessment duty does not require the firm to obtain updated information periodically. The duty to obtain relevant information applies each time a personal recommendation is given, but not otherwise. Indeed, the suitability assessment duty specifically states:
A firm is entitled to rely on the information provided by its clients unless it is aware that the information is manifestly out of date, inaccurate or incomplete.
So a firm will continue to get the benefit of this legislative protection even if it is aware that its client information is out of date, just not if it is 'manifestly' out of date.
The third thing to say is that the suitability assessment duty does not require a firm to ensure that a personal recommendation is suitable for its client. It merely requires the firm to 'take reasonable steps' to ensure that that is the case. A firm might well be able to establish that 'reasonable steps' involve something less than the steps required for personal advice to be deemed to be in the best interests of a client under FoFA.
Reader beware
So there you have it. If you read the FCA's report and went no further, you could be forgiven for thinking that the suitability assessment duty is much more demanding than the FoFA duties applying to personal advice given to retail clients. However, you would be wrong. Which goes to the riskiness of reading regulatory guidance without also going back to the law. But that is another hobby horse for another day.