Wealth managers put clients at risk, says FSA

Investigation prompts City regulator to order 260 firms to review advice given to clients or face disciplinary procedures

Wealth managers have been accused by the Financial Services Authority (FSA) of putting their clients into inappropriate or high-risk investments. The City watchdog said firms have "significant widespread failings" after its investigations revealed that four out of five client portfolios had a "high risk of unsuitability".

The FSA reviewed the suitability of client portfolios in a sample of firms across the wealth-management industry. But the damning results revealed that 14 out of 16 firms – which the FSA refused to identify – posed a "high or medium-high risk of detriment to their customers", with 79 per cent of files having a high risk of unsuitability. The firms reviewed ranged from small independent wealth advisers to the UK arms of global banks, suggesting that problems are endemic in the industry.

The watchdog has been so alarmed by the results of its investigation that it yesterday wrote to the chief executives of about 260 wealth-management firms warning them to meet regulatory suitability requirements or face censure. Margaret Cole, the managing director of the FSA's conduct business unit, said: "We had concerns that firms were not taking reasonable care to organise and control their affairs responsibly and effectively, using adequate risk-management systems." She warned firms to collect more information on customer needs and to make sure their advice is compatible with that data.

The 14 firms highlighted have been informed of their failings and some "have already put in place major rectification programmes", according to the FSA. The watchdog is now undertaking follow-up work with the firms reviewed, which it hopes to complete by the end of the year. But it warned that it would be looking closely at all 260 wealth managers that come under its control to ensure they are not putting clients' money at risk.

The watchdog's research suggests that many firms are either ignoring or not taking into account clients' concerns when allocating investments for their cash. The list of wealth managers' shortcomings include: an absence of basic know-your-customer information or out-of-date information; inadequate risk-profiling; the lack of a record of clients' financial situation; and the failure to obtain sufficient or any information on client knowledge, experience and objectives.

In short, 14 of the 16 firms reviewed had no clear records of the advice they may have given to their clients or even whether they had talked to them or had their proper up-to-date details. In light of that, the FSA's accusation that the firms may have put their clients into investments that may not have matched their risk profile stands up.

Gary Linieres, commercial director of wealth-management platform provider Third Financial, said: "Wealth managers will have to show the process by which they have decided whether the investments they have made on behalf of their clients are suitable for the risk profile and mandate they have set for their clients. If wealth managers aren't doing this already, then they will find themselves in a sticky situation."