By Nick Baxter
27th March 2014
 

The Financial Conduct Authority [FCA] has announced that it has fined Santander UK Plc £12,377,800 after the regulator uncovered serious failings in the way it offered financial advice. In their press release, the FCA state that “The failings took place despite repeated communications and warnings about suitability of advice to the industry by the Financial Services Authority (FSA), the FCA’s predecessor, and were uncovered by both a mystery shopping exercise and wealth management thematic review by the regulator.”

The warnings have in deed been voluminous and detailed

Firstly, the FSA carried out a mystery shopping review. The results of that review covered the quality of investment advice in banks and building societies. The main reasons for poor advice, where the advisers’ recommendations were judged to be not suitable, included a failure to correctly assess the level of risk customers were willing and able to take, a failure to understand customer needs and the length of time customers wanted to hold the investment.

“High number of unsuitable investment selections”

As a result of the mystery shopping review, the finalised guidance on assessing suitability was published in March 2011. The main purpose of that guidance was to eliminate “The high number of unsuitable investment selections”. Anyone involved in investment advice should have been left in no doubt that The Conduct of Business Sourcebook [COBS] 9.2.1R required a firm to take reasonable steps to ensure that a personal recommendation, or decision to trade, is suitable for its customer. It also required [COBS 9.2.2R] firms, among other things, to take account of a customer’s preferences regarding risk taking, their risk profile and ensure that the customer is able financially to bear any related investment risks consistent with the investment advice/objectives.

The suitability of their customers’ investment portfolios

In a speech at the APCIMS (now the Wealth Management Association) Compliance Conference in July 2013, Clive Adamson (Director of Supervision at the FCA), reminded delegates of the FCA review of 16 wealth management firms and the findings. He reminded delegates that the FCA had discovered a wide range of widespread issues, with most firms in the sample being unable to demonstrate the suitability of their customers’ investment portfolios, either because of the lack of client information on file, or because the portfolios did not appear to match customers’ investment objectives or appetite for risk. The implications for firms were highlighted in a FCA ‘Dear CEO letter’ which required CEOs to review the FCA findings and consider the implications for their firms

Based on the historic guidance from the regulator, it is of concern that the FCA found, “that there were significant deficiencies in Santander’s processes for ensuring that: a) customers received suitable advice; b) in relation to its Premium Investments, regular reviews were carried out to check that investments continued to meet customers’ needs and that the service promised to customers was actually provided; and c) financial promotions and communications with customers were fair, clear and not misleading.”

Customers need to trust firms

Those who give advice really need to understand the message that customers need to able to trust firms to help them manage their money wisely and they just have to live up to that responsibility. As Tracey McDermott (FCA Director of Enforcement and Financial Crime) states, “If trust in financial services is going to be restored, which it must be, then customers need to be confident that those advising them understand, and are driven by, what they need.”