Ensuring Investment Suitability ©2016 Distribution Technology Ltd. All Rights Reserved. Rory Percival, Technical Specialist, FCA, chaired by Simon Jack Suitability Q&A

Project Innovate Financial Advice Market Review (FAMR) Research and due diligence (R&DD)

Agenda 1.Project Innovate What does the FCA support innovation What the Innovation Hub does What we can offer Initiatives in train Next steps 2.Financial Advice Market Review (FAMR) 3.Assessing suitability Why look at R&DD? Thematic Review What we did Key findings Areas for consideration (including good/poor practice) Key takeaways and next steps

FAMR: Key Information  Joint HMT/FCA review  Focused on how financial advice could work better for consumers: −Where are the advice gaps? −Supply and demand-side barriers −Focus on technology/innovation −Solutions to make market work better −Call for Input held in Q4 2015

Project Innovate The FCA Innovation Hub

Why does the FCA support innovation? Our objective: promote competition in the interest of consumers Implications for consumers: Increased range of services Lower cost Improved access

What the Innovation Hub does The Hub’s two main roles: 1) Direct Support 2) Policy and Process Change

What we can offer Advice/clarification Informal steers Meetings with relevant departments

Initiatives in Train Call for Input on barriers to digital and mobile solutions Regulatory Sandbox Themed Weeks

New market entrants: an end-to- end experience International Engagement Engagement with large incumbent institutions

Regulatory Sandbox Published plans to implement a regulatory sandbox Regulatory sandbox – safe space for businesses to test out innovative ideas with real people Plans propose:  FCA options – restricted authorisation, no action letters, waivers and individual guidance  Industry options – Virtual sandbox, authorised firm umbrella FCA to open Sandbox Spring 2016

Assessing suitability: Research & Due Diligence (R&DD)

Why look at R&DD? What is the purpose of R&DD? -Understanding recommended solutions -Funds/products/services -Two fundamental questions Why are we interested R&DD? - A root cause of unsuitable advice - To understand firms’ approaches

What we did -Pre-consultation -13 Advisory firms -3 Provider firms -7 Third party consultancies

Key findings -Majority of firms demonstrated elements of good practice -Often not replicated across the entire approach -Importance of culture of challenge

Criteria for selecting an investment solution Prescription Various criteria used for selecting investment solutions Link to customer needs and objectives Review of criteria

Assessing risks Volatility Various factors to consider including: Risks of underlying investment Product structure & complexity Presence/Absence of protections Fact vs opinion Familiarity with product/provider/assets

Provider due diligence Provider’s ability to continue providing the service: Financial strength Commitment to the market Broad understanding of firm’s position Entrusting the firm with client money

Platform due diligence Is it appropriate to recommend a platform? Criteria for the platform Objective approach rather than ‘retro- fitting’ Does the platform: Only receive remuneration permitted by the rules? Present retail investment products without bias?

Expertise Skills, knowledge & expertise Outsourcing to a third party Competence of the third party Cannot delegate responsibility for suitability

Implementation Effective communication of R&DD results throughout the firm Alerts Training/guidance

Ongoing reviews Constant change Structure of markets Proposition offerings Your client banks Revisit and refresh Periodic reviews vs ad hoc reviews

Key takeaways 1.Culture of challenge 2.Revisit & refresh 3.Size doesn’t matter TR16/1 Assessing suitability web-page Watch this space

QUESTIONS?