FSA investigates wealth management firms

The Financial Services Authority is continuing to investigate wealth management firms after an initial analysis highlighted irresponsible conduct.

The FSA is continuing to investigate wealth management firms after an initial analysis highlighted irresponsible conduct.  Criticisms of both banks’ wealth management arms and independent wealth managers included poor record keeping and exposing clients to unnecessary levels of risk.

The Retail Conduct Risk Outlook report, published February 28th, analyses current trends and how they may translate into conduct risk; the risk that firms’ behaviour will result in poor outcomes for consumers. The report cites data from Compeer and Mintel, which found that the value of investment assets held in 2009 by private banks was £131 billion, and the sector generated a total of around £1.867 billion.

The FSA says: “We carried out some analysis on wealth management activities in a number of firms (including several independent wealth managers that are not subsidiaries of banks), which identified poor practices, including increasing clients’ risk levels, unwarranted use of complex, illiquid, high-cost products, the use of convenient statistical data that understates particular risks, and poor record keeping.”

“We are now carrying out further investigation in other firms of some of the issues we identified.”

The retail banking sector has increasingly been selling complex investment products such as structured products.

There is a danger that banks may encourage existing private banking clients to take more risk with their savings than is appropriate.  Banks may also inappropriately sell to affluent and mass affluent customers, either through up-selling into private banking, or by offering unsuitable wealth management products via their retail banking arm.

The FSA says poor risk-profiling may have already resulted in some retail consumers taking on more risk than they are prepared to accept.

Future potential hazards in the wealth management industry include: banks encouraging existing private banking clients to take more risk with their savings and investments than is wanted or appropriate through the sale of complex or illiquid products; aggressive sales incentives push relationship managers  to highlight benefits and downplay the risks of the products they are trying to sell; banks inappropriately selling to affluent and mass affluent customers by up-selling them into private banking; selling of unsuitable products for the customer’s circumstances; poor risk profiling.

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