Guide to suitability and duty of care

How to help deliver financial solutions that meet client needs

At a recent FTAdviser event, the Financial Conduct Authority's proposals about duty of care were the main topic of discussion.

The briefing, hosted at the Financial Times in London, brought together speakers and attendees from across the wealth management and advice industry.

Sir John Redwood of Charles Stanley gave his thoughts on the outlook for global markets this year and whether client concerns about a recession are founded.

Then Sebastien Petsas, director, regulatory consulting at Duff & Phelps, moved the discussion onto the FCA’s duty of care consultation paper and what the regulator expects from advisers when it comes to duty of care and suitability.

And advisers gathered at the event discussed what their concerns were about the duty of care proposals, as well as how they deliver financial solutions that meet client needs.

Read on to find out more about the topics covered during the suitability and duty of care briefing, in association with Charles Stanley.

What the regulator expects from advisers when it comes to duty of care and suitability

Last summer the Financial Conduct Authority explored, as well as requiring advisers to treat customers fairly, whether a new duty of care could enhance good conduct and culture and provide additional protections for consumers.

The Financial Conduct Authority published proposals in discussion paper DP18/5, titled 'A duty of care and potential alternative approaches'. Guidance for firms to help them understand more clearly our expectations and requirements for dealing with vulnerable people has been promised for the start of this year.

However the FCA's paper states: “Some stakeholders have raised concerns that our current regulatory framework does not provide adequate protection for consumers. They have called for the introduction of a ‘duty of care’ on firms when dealing with consumers.

“It has been suggested by some that the extent and longstanding nature of consumer detriment indicates that cultural change is required within firms and the market as a whole. They consider that current regulation has not yet delivered the change required, and that a duty of care would do so.”

The paper also noted some had suggested this could become a “fiduciary duty”, the difference being “a duty of care is a positive obligation whereas a fiduciary duty is largely a prohibition”, the FCA said.

It is this set of proposals that were at the heart of FTAdviser’s breakfast briefing, sponsored by Charles Stanley.

Question marks

As Damian Fantato (pictured), deputy editor of Financial Adviser, acknowledged in his opening statement at the masterclass on February 27: “A number of consumer bodies have called for this but the proposal has been controversial for several reasons, not least because there are question marks over whether it adds anything to the existing responsibility that advisers and investment managers have.”

At the briefing, Sebastien Petsas, director of regulatory consulting at advisory firm Duff & Phelps, said: “Needless to say, there’s a lot of debate as to whether or not (a duty of care responsibility) it is required or needed.

“I think you would struggle to find people who are advocating for its implementation, within this sector particularly.”

He acknowledged that the formal concept had not even been defined yet, as either a duty of care or fiduciary duty, and even suggested “perhaps it will be more of a legal definition”.

He explained the proposals from the regulator were about “taking one of the FCA’s principles they already have in place and strengthening them to try and capture any weaknesses they think they have within their existing regulatory framework”.

It really is a holistic view of the firm that can feel very intrusive.
Sebastien Petsas, Duff & Phelps

Mr Petsas (pictured) talked through what Duff & Phelps does when it goes into an advisory company to conduct a “regulatory commissioned review”.

He explained: “The FCA is mandating an independent party to take a look at the firm’s systems, controls and governance, etc, and to give a viewpoint.”

But he warned: “It really is a holistic view of the firm that can feel very intrusive.”

What to prepare for

Mr Petsas told advisers gathered at the breakfast briefing, which took place at the London office of the Financial Times, that the review would start by looking at governance materials, then at systems and controls more generally.

He explained the company carrying out the review would likely ask: “How have those [systems and controls] been put in place? Did you go through a regulatory risk mapping exercise in order to identify what needs you might have, depending on what your most risky areas are?

“We’ll take a look at your compliance and risk frameworks and look at risk registers, including to see what oversights compliance and the board has over that process.”

He continued: “Breaking it down even further, then we’ll look at what your compliance teams are actually doing. Do they have compliance monitoring programmes? Is the monitoring effective?

“[We’ll] take a look at internal audit. How does that third line of defence work in practice? Is it doing what it’s meant to be doing? Does it provide the necessary challenge?

“Policies and procedures – are those in place? Are they up-to-date? Are they regularly updated? Who signs those off? Are they adequately detailed?”

He told delegates at the briefing: “Even if the FCA has actually said, ‘I want you to look at this firm because we have an area of concern around suitability, or outsourcing’, it is not going to be focused on just that one aspect.”

Mr Petsas explained the review would look at an adviser company in its entirety: governance, policies and procedures, controls, compliance, risk, internal audit, training.

Finally, a review would require a sample of customer files – “from the minute the first contact is made, through the factfinding, to general communications, to the business contract stage, to the actual recommendation, and then the ongoing monitoring, ongoing communications and any complaints that have been made”, he noted.

The real issue here is, we can do everything in the best interests of that client but if it’s not evidenced that’s where you get into trouble.
Mitesh Patel, Saunderson House

“When we do these reviews, and considering the FCA’s principles, as well as all these different areas of regulation I’ve already given an overview of, adding yet another requirement for formalised duty of care, it seems as though that could very easily fit into one of the other buckets,” he suggested.

“From our viewpoint, it should really be more of a case of if there’s a specific area of risk that is perhaps what they’re looking to address it might be better to issue an updated guidance note.”

Client interests

But Barry Bennett, principal of Bennett Wealth Planning, who attended the briefing, pointed out: “I just think we’re already getting to a stage where, as a regulated adviser and wealth manager, we’ve got enough at the moment.

"So I would support what you’re saying. We’ve got SM&CR [Senior Managers and Certification Regime] coming through later this year, which is really about defining what everyone’s role is. I run a very small family boutique. In other words, we have to do a lot of the overlapping functions.”

He suggested advisers already had a duty of care to their clients: “I am responsible, as a regulated adviser, for the regulated investments I do. For example, we’re going through Mifid II at the moment, with this declaration of the annual charges.”

He added: “I believe I’ve got a duty of care to my clients to make sure when we produce these annual charges to our clients that they’re meaningful, that they can understand them.”

There was some agreement from attendees that the FCA should wait until after the Senior Managers and Certification Regime has come in this December before acting upon their duty of care proposals.

Mitesh Patel, head of compliance at London-based financial planning firm Saunderson House, said: “The real issue here is we can do everything in the best interests of that client but if it’s not evidenced that’s where you get into trouble – that’s the real issue. You truly do not know, have I done enough in this area?"

He asked: “If you put in another duty of care, is that the same as conduct, is that the same as principles?”

Sir John Redwood, chief global strategist at Charles Stanley, on understanding markets and the concerns of clients

I think clients became very worried towards the end of last year because we saw quite a sharp sell-off in financial markets and talk there could be a recession in late 2019 or 2020.

What were the rights and wrongs of that discussion? We saw a sharp sell-off and we’ve now had quite a sharp recovery in January and February.

I think the position is the main world authorities tightened money too much in the second half of 2018, and there was a danger the slowdown they had created would turn into something worse.

Indeed, it had already started to turn into something worse in the weakest parts of the advanced world, with Italy going into recession in the second half of last year and Germany practically in recession, with a very bad third quarter and a flat fourth quarter.

We have been warning people we thought the central banks were overdoing it.

The main problem came from the US Federal Reserve (Fed). The Fed had a concept of something called 'normal' and they were looking back to interest rates and money creation prior to the financial crisis.

On the other side of the world, there was a similar kind of problem with the world’s second biggest economy, China.
Sir John Redwood, Charles Stanley

I think they did misjudge it, I think they thought we were closer to pre-crisis conditions than we actually are and the markets had a big tussle with them.

I think my worst day, holding the view that the Fed were bound to give in, was the day when the President of the US went public with his criticism of them as well. That was clearly an unhelpful intervention.

[US President] Donald Trump was right but he shouldn’t have criticised the Fed in this way as he was found to attract a lot of criticism for his intervention. But we got over that wobble and the Fed duly climbed down.

There were very important statements made by [Federal Reserve chairman] Jerome Powell and other leading Fed board members early in January, where they said maybe they had misjudged quantitative tightening.

They said maybe they shouldn’t keep slimming their balance sheet as quickly as they had been doing in November and December, when it was quite acute. They acknowledged maybe their 'three dot plot' interest rate rises put into the system for 2019 would not be necessary.

They adopted the word that they would be “patient”. And on that single word “patient”, the markets then had a rush of blood to the head and decided that maybe the Fed had cancelled the world recession after all. Perhaps the Fed had begun to understand the very good points the market had been making.

Over to China

Meanwhile, on the other side of the world, there was a similar kind of problem with the world’s second biggest economy, China.

The Chinese authorities had been wrestling with themselves throughout 2017 and 2018. They knew that their non-banking financial sector had got very over-extended and had come up with all sorts of clever ways of avoiding the controls of bank credit.

They knew that their official banking system - much of it state-owned and everything very heavily state-directed - had quite a lot of bad loans in the system and had probably extended too much credit to too many traditional industries. The Chinese state, and therefore the Chinese taxpayers, both owned the state bank that had made the bad loan and they owned the nationalised industry that had borrowed the money they could not afford to repay.

They decided they could reduce the rate of money growth without doing huge damage to the economy.

Since then we’ve seen a 20 per cent rise in Chinese stocks, partly around the news narrative of trade talks, but I don’t think it is just about trade talks.
Sir John Redwood, Charles Stanley

But they then discovered, of course, that they had engineered quite a sharp slowdown.

Then they had to start experimenting with ways of allowing some additional credit, while at the same time carrying on with this difficult process of reducing bad debt and reducing credit advanced to those who could not afford to repay it.

We saw them tinkering around with reserve ratios, so they were allowing banks to lend a bit more for any given amount of capital. We saw them making some tax cuts to try and boost consumption a bit.

More recently they have realised they have quite a serious problem of having slowed the economy too much.

They have now adopted a ‘three arrows’ strategy of encouraging more short-term lending to growing businesses for trade credit and working capital, more long-term lending for investment, and they are now working on an equity injection package as well.

They are desperately trying to promote a faster growing private sector to carry out the big transformation of the economy that is underway.

So they want growth and more credit in technology and services, and they still want to carry on closures and reductions in the traditional industries where they’ve got overcapacity.

They, as a dominant player in the world, are creating weak prices against themselves in areas like steel and many components.

I think they too will tend to get the balance right later on this year and the markets seem to think that.

I called that China looked incredibly cheap, around the turn of the year. The stock market was half the level it had been at the 2015 peak, which was very over-extended.

Since then we have seen a 20 per cent rise in Chinese stocks, partly around the news narrative of trade talks, but I don’t think it is just about trade talks. I think it is also about people realising they’re not going to overdo the squeeze on the banking system.

A temporary fix

We then come to the eurozone: less good news to report there.

The eurozone too was gripped by this idea of 'normal', which is such a damaging concept.

They decided to end quantitative easing at the end of last year, so there’s now quite a headwind which has already affected the banking system and credit creation in the eurozone.

They are struggling with lopsided problems of the zone where you’ve got this dominant German economy in massive surplus, generating huge cash surpluses out of its trade surplus, and then a rather starved southern part of the zone, heavily in deficit on trade account, struggling to get enough cash and credit.

There is quite a bit of political risk there, with populist parties likely to do extremely well in the elections around Europe.
Sir John Redwood, Charles Stanley

Fortunately, they have come up with a temporary fix, which we hope is a permanent fix. The fix is that they use these target two balances.

So Germany deposits their surplus at zero interest in the central bank, now running at about €930bn (£795bn) of interest-free deposits given to the zone, and the European Central Bank lends that on, also at zero interest, to the banking systems of Italy, Greece, Spain and Portugal primarily.

It will be very interesting to see, in the European elections, and in the choice of a new European Commission, whether they want to expose this and come up with any more normal fixes.

Because a more normal fix would be to have a proper transfer system, so that you may grant directly to the deficit parts of the zone, as you do in the sterling zone or the dollar zone.

With this fix the rich parts pay more tax and sends the money to the poor parts to pay for extra benefits, regional policies, for local government policies, and so forth.

You do not have those in the eurozone, it is all done by these balances.

So there is quite a bit of political risk there, with populist parties likely to do extremely well in the elections around Europe, and for the first time, you’ll have populist commissioners.


I think the UK economy has performed remarkably well, given the very negative policies being pursued.

We saw a very tough credit squeeze initiated from the Spring of 2017, with tough guidance against car loans and certain types of mortgages.

It followed on from [former chancellor George] Osborne’s attack on the buy-to-let market and second properties. It was then exacerbated by the [chancellor Philip] Hammond's attack on diesel cars and expensive cars.

The combination of the money squeeze and the fiscal attack on key sectors - property and cars - did have a very visible impact on those sectors, with a 25 per cent slash in diesel car sales being the most notable and unfortunate.

But despite all of that, the UK economy is growing faster than the eurozone and is still very robust.

We think there will be slower growth this year, most notably in the first half.
Sir John Redwood, Charles Stanley

There is this phenomenally successful competitive City at the heart of the UK economy, which is really competitive at these currency rates.

UK assets look pretty cheap to me despite the very tough money squeeze, where they halved the money supply growth last year, and despite the pretty big fiscal squeeze.

There was, of course, an unplanned fiscal squeeze in the current year, where HM Treasury got its numbers wrong by about £15bn. There was £15bn more taken out of the economy than they planned.

Putting that all together we don’t think there will be a global recession.

We think there will be slower growth this year, most notably in the first half, because of the squeezes administered in the second half of last year.

We think the main central banks, with the possible exception of the Bank of England, got the message and are now relaxing in the way they need to.

We think you muddle on in this much unloved bull market.

But you should still make a bit of money out of real assets. You’re certainly not going to make much money out of cash and bonds.

How to deliver financial solutions that meet client needs

Advisers now have a number of outsourced solutions at their disposal to help them deliver financial solutions to their clients.

But how can they make sure these solutions meet duty of care standards and the requirements of industry regulation more generally?

This was one of the discussions that took place at the FTAdviser breakfast briefing in association with Charles Stanley, on February 27 at the London office of the Financial Times.

Damian Fantato, deputy editor of Financial Adviser, said in his introduction at the briefing: “An increasing number of advisers outsource their clients’ investments, so one of the issues we’ll be examining in close detail is how a duty of care might affect the outsourcing process and how advisers would tailor investment solutions to their clients’ needs if this were to go ahead.”

Sir John Redwood, chief global strategist at Charles Stanley, explained: “People [advisers] either have their own investment research capability, so that they’re following these markets and the assets, and making their own decisions, or they subcontract to specialists who follow markets and make asset allocation recommendations and individual share recommendations.

“At Charles Stanley, we place quite a lot of emphasis on asset allocation. So that requires a lot of work on how these economies, money supplies, central banks, government policies are evolving because these things all have an impact.”

Mr Redwood set out why that first adviser/client meeting was so important in understanding what the client’s needs and expectations are, before selecting an outsourced solution for them.

Most firms will at least have an annual review with their customers to make sure there is that touchpoint, that ongoing communication.
Sebastien Petsas, Duff & Phelps

“The regulatory system is very sensible in making you sit down and have that informed set of conversations with your client when you first set the account up, because you need to know what they think and feel, what their appetite for risk is,” he pointed out.

“And you need to understand that people’s appetite for risk evolves. Indeed, it can change every day. Some people have a very strong appetite for risk in a rising market, and a very low appetite for risk in a falling market because they’re carried away by the common emotions.”

Speakers were asked how advisers can approach that issue of suitability and attitude to risk and make sure they are looking after their clients’ interest in an environment when it might suddenly change.

Mr Fantato cited an example of a large advice company which had recently warned that in the run-up to Brexit their clients’ attitude to risk might change quite suddenly.

Sebastien Petsas, director of regulatory consulting at Duff & Phelps, replied: “Brexit, for example, it’s not something that is a sudden shock.

“Certainly, you see firms writing to their customers at present and have been for the last two years, saying this is happening, this may be the fallout, we are just keeping you aware. If you want a discussion with us, let us know.”

He acknowledged: “Obviously, most firms will at least have an annual review with their customers to make sure there is that touchpoint, that ongoing communication, to make sure we all know where you’re currently sitting.”

But Mr Petsas suggested advisers “should just be having those ongoing conversations with your customers and be able to evidence it”.

Outsourced providers

So what is the role for a company, like Charles Stanley, in the outsourcing process when it comes to making sure clients are invested suitably?

Mr Redwood explained: “I think the good outsourcing company respects the fact that an IFA has the client and develops that client relationship.”

He insisted: “We’re not trying to lift the client off the IFA. We want to work with the IFA. But an IFA – unless it is a very big firm with a very wide ranging capability – can’t do everything to an acceptable standard and they really want to specialise in building the client relationship and developing the client business.

“So that is where a firm like Charles Stanley can be very helpful.”

I think the good outsourcing company respects the fact that an IFA has the client and develops that client relationship.
Sir John Redwood, Charles Stanley

One of the attendees, Barry Bennett, principal of Bennett Wealth Planning, pointed out often his job was “actually to help my clients make less bad decisions sometimes”.

“There has been a lot of worry for clients at the moment,” he observed.

"Everyone is giving them negative news all the time and frankly, the markets have been to my surprise, pretty robust.

“Our job, to a degree, is to take the emotion out of investing and advising our clients not only to do the right thing by aligning financial planning with wealth management, but making sure sometimes, they don’t do the wrong things, which is selling just when the market drops.”

Use of tech

The discussion moved onto the topic of technology and how it might be harnessed by advisers to help match clients with the right investment or financial planning solutions.

There were mixed views from panellists and attendees on the subject of technology and robo-advice.

Asked whether technology can help the advisory community, Mr Petsas said “broadly, yes and no”.

He noted: “We can see it being used appropriately and disastrously.”

Will Walker-Arnott, investment manager at Charles Stanley, explained he saw the future of wealth management as a hybrid, where clients want to access portfolios 24 hours a day and there was a “huge opportunity to create efficiencies”.

Another attendee, Gemma Barker, a trainee adviser at KMG Independent, remarked the company she worked at had been looking at an automated service but had questioned whether clients would be getting enough care.

“Will they understand the implications of what they’re filling in,” she asked.

This is a key consideration.

As the FCA's 2018 discussion paper on duty of care stated: "We expect firms to frame decisions for customers based on real consumer behaviours and not to exploit biases.

"For consumers, businesses and regulation this is a challenging balance to strike."