How to prepare for a Suitability audit

If you have been contacted by the Financial Conduct Authority (FCA) regarding a Suitability audit, this article should help you prepare for it. The FCA will be reviewing your firm’s processes relating to the due diligence (including research) undertaken to ensure that customers are sold suitable products and services. This will include (but is not necessarily limited to) the way in which firms filter products/funds/ services and ensure that they understand the features and associated products and services they recommend. This is seen as key to the provision of good advice.   If past reviews are anything to go by, there will be two stages to the assessment:

• Review of pre-visit information (see below)
• A one-day on-site visit – following the pre-visit information the firm will be visited and key individuals interviewed.

The purpose is to understand how the firm approaches due diligence, including research, for the products and services recommended.

Pre-Visit Information
Background Information

1. Business model and investment proposition
   1. Provide a copy of the new business register covering all advisory business from 1 January to 31 December
   2. The information must include:
      1. The products/services recommended;
      2. The provider of the products/services;
      3. Whether the recommendation was for a platform solution (and if so the platform name); and
      4. The amount invested
2. Confirm whether the firm operates as “independent” or “restricted”
   1. If operating as independent, but with a “narrower relevant market” (for example, ethical investing) confirm what the narrower relevant market is
   2. If “restricted” the precise nature of the restriction
3. Which of the following investment propositions are followed?
   1. Panels/buy lists
   2. Multi-manager funds
   3. Model portfolios, internal, constructed and run by the firm
   4. Model portfolios, external, constructed and run by a third party firm
   5. DFM (referring to external DFM)
   6. DFM (in-house management)
   7. Other – specify
4. Does the firm have a defined client bank/target market. For example, do you target clients:
   1. With a certain level of assets
   2. With a certain level of income
   3. At a certain life stage
   4. Of a certain profession that fit any other particular criteria
5. Provide a summary of how and why the decision was made to target the client categories chosen
   1. Information on the approach to conducting due diligence
6. Describe current research and due diligence on the products and services that are recommended. This should include:
   1. The steps taken
   2. Any tools (research) or third parties (consultancy, research firms) and the output from these
   3. The criteria applied in selecting/excluding certain products and services
   4. Additional research on shortlisted products and services; and
   5. Any additional research on shortlisted providers
7. When answering 6, make sure you include how this process is carried out in relation to the following):
   1. Collective investment schemes (limited to UTs, OEICs, investment trusts and ETFs)
   2. Income drawdown products
   3. Platforms (including both fund supermarkets and wrap platforms)
   4. DFMs (i.e. if you refer to DFMs for investment management)
   5. NB If you do not recommend any of these products/services, confirm this.
8. Who in the firm is involved in the due diligence process? If multiple individuals, highlight each individual and their role)
9. Confirm whether there is a process for reviewing research and due diligence over time. If so, provide a summary of the nature of that process including what it involves and when it is undertaken.
10. Confirm whether any changes in approach to research and due diligence have been implemented over the past two years. If so, what have those changes been, and what was the catalyst for the change