The Financial Conduct Authority (FCA) has set out good and bad practices for wealth managers and private banking firms with their own in-house investment products, following its review into the sector.
In the review, the regulator assessed 18 firms managing a total of £146bn and which on average invested 20% of client assets into such in-house products.
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The review evaluated how well firms identify and manage conflicts of interest during use of in-house products (IHPs) which are investment vehicles manufactured by a wealth manager and placed into portfolios the firm runs on behalf of clients, creating a potential conflict of interest.
The FCA review unveiled that overall senior management at wealth management firms identified these risks and had remedial measures in place to manage the conflicts of interest, with some firms involving third parties to report on their effectiveness of their controls.
It was further revealed that though firms were usually clear about the distributor-product manufacturer relationship, in some cases, there were ambiguous terms which could lead to consumer confusion about the exact nature of the service being offered by the firms and the likely extent to which they would use IHPs.
However, the review also highlighted loopholes in the way firms monitor the use of IHPs and communicate with consumers.
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By GlobalDataRobert Taylor, FCA head of wealth management and private banking, said, "We’d like to see all wealth management firms that make significant use of in-house products able to explain how this fits within their wider business strategy and is aligned with their customers’ interests. We’d also like firms to ensure they have clearly explained the use of IHPs to their customers."
