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Key steps investment consultants need to take to avoid regulatory action

Following its recent asset management market study, the Financial Conduct Authority (FCA) has called for an investigation by the Competition and Markets Authority (CMA) into the investment consultant sector and recommended that investment consultants are brought into its regulatory perimeter. Its main concerns relate to possible competition issues and conflicts of interest, with some firms offering both advisory and fiduciary management services, accepting gifts and hospitality, and a lack of disclosure of information relating to performance and services provided.

Although the investment consultants examined as part of this market study were able to demonstrate some arrangements to mitigate conduct risk, the FCA stated that such provisions do not fully address its concerns and a full investigation of the sector is required to put appropriate remedies in place.
 
With the risk of being subject to formal regulatory investigation, investment consultants should be on the front foot to avoid potentially costly FCA-mandated remediation action. Investment consultants should focus on enhancing their processes and controls to ensure that appropriate and effective governance and control frameworks are in place. The following key principles should be considered:

  • Code of Conduct: implement a code of conduct requiring each employee to act with integrity in accordance with duty of care to its clients, in the best interests of its clients and honestly, fairly and professionally – the code should cover gifts, hospitality and entertainment. Consultants should hold appropriate training sessions for all employees and ensure that all have signed this code
  • Compliance and Corporate Governance: reinforce and maintain a compliance function that operates independently and implement adequate policies and procedures in line with the nature, scale and complexity of their activities. Consultants should also ensure that appropriate governance and activities of senior management bodies are in place to cover their business. Consultants should establish and maintain adequate internal control mechanisms designed to secure compliance with decisions and procedures at all levels of the firm
  • Conflicts of interest: ensure that conflicts of interest arising from their business model, both between Consultants and their clients and between a client and another client, are identified and appropriate controls are in place (including Chinese wall controls between advisory and fiduciary management services, disclosures, record keeping)
  • Information about the firm, its services and remuneration: ensure that appropriate processes, controls and monitoring framework are in place to enhance transparency of fees charged to clients and communicate information in a way which is clear, fair and not misleading. This should include written notifications of the key features of the services provided, including production of cost and charges information. An annual disclosure statement could also be sent out to clients
  • Disclosure requirements: to enhance transparency and allow better client assessment of capability, consultants should disclose performance information on publically accessible sites or databases – alignment of standards governing how performance information is calculated and presented might be required across the sector
  • Complaints handling and resolution: ensure that appropriate processes and controls are in place for complaints handling and resolution – appropriate record keeping requirements should also be in place to ensure complainants are treated fairly.

These recommendations are based on current financial services regulatory best practices and also consider forthcoming regulatory changes relating to conduct of business. Being proactive in implementing these principles will help investment consultants address the majority of the concerns raised by the FCA and, if effectively embedded, avoid potentially expensive and invasive regulation action in future.

Back to July 2017

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