UK regulator reviews conflicts of interest around in-house investment products

The Financial Conduct Authority (FCA) has completed a review of the wealth management and private banking sector assessing how well institutions within the sector manage conflicts of interest when using in-house investment products (IHPs) including structured products.

According to the FCA, IHPs are manufactured by the firm (or another firm in the same group of companies) and then placed into customer portfolios, which creates a potential conflict of interest. Overall, said the FCA, senior management recognised these risks and had taken steps to manage the conflicts of interest in relation to IHPs.

As an example of good practice the regulator pointed to reverse inquiries involving structured solutions.

“Firms were able to clearly demonstrate that customer-driven products, such as structured products, were executed on an unbiased pricing basis, even when the firm’s own in-house manufacturer was approached in the process,” it said.

However, the UK regulator also found weaknesses in the way firms monitor how IHPs are used and communicate with consumers.

“We’d like to see all wealth management firms that make significant use of in-house products able to explain how this fits within their wider business strategy and is aligned with their customers’ interests,” said Robert Taylor, the FCA’s head of wealth management and private banking. “We’d also like firms to ensure they have clearly explained the use of IHPs to their customers.”

Governance
The FCA reviewed firms’ business strategies and governance, how well they identified and managed conflicts of interest, their management information, the use of sales targets and remuneration, product selection, and communications with customers.

According to the FCA, firms generally recognised potential conflict of interests and some firms engaged third parties to report on their effectiveness of their controls. Most firms had identified and recorded conflicts of interest that arose in relation to distributing IHPs and had mitigation plans in place.

The FCA also said that although firms were generally clear about the relationship between the distributor and product manufacturer, in some instances there were inconsistent and ambiguous terms which could leave consumers unclear of exactly what service they were offering and the likely extent to which they would use IHPs.

In addition, several firms with high proportions of assets under management invested in IHPs did not monitor how these were used in customer portfolios.

“Our review showed manufacturers of IHPs had an approach to check that products were reaching the intended target market through the distributor at the customer on-boarding stage, which was updated and reviewed annually,” said the FCA. “We saw clear evidence of distributors discontinuing the use of products, including IHPs, and putting funds on probation in response to underperformance against benchmarks. This was as a result of regular reviews of product performance.”

The thematic review on IHPs is part of the FCA’s work to protect consumers’ interests and enhance market integrity.

Click the link to read the FCA’s thematic review.