The UK Financial Services Authority (FSA) remains concerned that private banks and the wealth management industry may be mis-selling products and exposing clients to unacceptable levels of risk.
In its 2012 Retail Conduct Risk Outlook, the UK regulator said that the current low interest rate environment was a strong incentive for firms to sell products that offer higher returns without adequately disclosing the risks.
The FSA’s concerns come despite handing down a series of heavy fines for providing inadequate advice last year and a ‘Dear CEO’ letter highlighting poor practices.
In November last year, Coutts was fined £6.3m ($10.2m) for failing to provide adequate advice to clients about the risks associated with AIG Life bonds.
In October, Credit Suisse UK was penalised £5.95m ($9.5m) for failures related to the sale of structured capital at risk products to private banking clients.
Sales suitability high on agenda
The FSA’s outlook said that some wealth management products were initially designed to be sold to institutional clients and were therefore more complex than those with which most banking clients were familiar.
The regulator added that it was particularly important that banks had regard for their treat customers fairly obligations when seeking to grow their wealth management business.
Two main risks were highlighted by the FSA. Firstly, it was concerned that banks encouraged existing private banking clients to take inappropriate risks with their savings, with aggressive incentives for relationship managers increasing the danger.
Secondly, the regulator highlighted that some banks may inappropriately sell wealth management products to affluent or mass affluent consumers, either by up-selling them into private banking or by offering them via their retail banking arm.
The FSA added that many firms were not gathering adequate client information to demonstrate the suitability of the products the have sold.
“Even where the information is available, there is a significant risk that consumers have unsuitable portfolios,” the report continued.
The FSA took regulatory action against a number of firms after writing a ‘Dear CEO’ letter in June last year.
The letter ordered firms to review the advice they gave to clients after its research had found 79% of client portfolios had a high or undeterminable risk of unsuitability.
“While some firms appear to have taken steps to improve record keeping and suitability, further work is needed to ensure change throughout the industry,” the report said.
The FSA said it was continuing to engage with regulated firms, consultancies and trade bodies to improve standards.