Due-diligence, suitability and all that 

The FCA published its Thematic Review (TR16/1) last month.  We had a vested interest in the results emanating from this initiative, as ValidPath were one of those intermediary firms that the FCA visited, in order to question us about processes, resources, disciplines and culture.

TR16/1 is a surprisingly brief paper, with only two pages summarising the FCA's findings.  This means that it is difficult to draw practical implications from it that are anything other than of a rather general nature.  However, this does not mean it is without value, as it may help to underscore the kinds of emphasis which have formed a core part of our guidance in recent years:

"We were disappointed to identify issues relating to platform research and due diligence, particularly having previously published our expectations..."
Based upon our own experience, ValidPath were not entirely sure whether or not the FCA actually understood the interaction between investment models and the selection of platform, as these two issues are frequently interdependent.  However, in broad terms, the FCA has a point: since your investment model is somewhat hypothetical until the point of delivery, IFAs must demonstrate acceptable due-diligence in respect of that delivery mechanism.  The "We just like using Transact" approach is certainly not acceptable in RDR World.
"Firms which demonstrated good practice had research and due diligence as a central function of the advice process"
We endorse this view without reservation.  When we encounter skimpy research, this is usually diagnostic of a low, casual view of financial outcomes for clients.  It should not be acceptable to any of us.  ValidPath provides Members with an excellent, whole-of-market research tool, and we expect to see it used fully and consistently.
"...inappropriate bias...conflicts of interest..."
The FCA deals with these two areas of weakness under section 2.3, and it may be wise to be just slightly skeptical about the criticisms.  Where they speak of "status quo bias", it is worth reflecting on how it is, in practice, that IFAs may find themselves in a groove when it comes to using particular providers (especially platforms).  It is, however, quite clear that the FCA does not think that "service" is an adequate justification for platform selection, when what is meant is the service to the IFA.  That is a perfectly valid criticism of intermediary practice.
"We saw one firm that...when it carried out the due diligence...selected criteria based on platform features that would make its existing platform come out as the preferred option, rather than carrying out an objective assessment."
We're very happy to confirm that this criticism would not have applied either to ValidPath, nor to the two Member Firms that FCA officials visited, but this does highlight one kind of practice that, historically, was quite prevalent within our industry. One of the reasons why ValidPath introduced DeFaqto Engage for our entire membership in 2014, was to supply our Members with unfettered access to a genuine research tool, rather than something that was crafted to 'compliancify' preferred choices with a veneer of something that had the appearance of due diligence.


Suitability and due-diligence are at the core of great financial-planning, and are essential to optimise the outcomes for clients.  ValidPath have consistently argued this point over many years, especially as the underpinning for genuinely independent advice.
 

Kevin Moss, 03/03/2016