Looking very carefully before you leap

Compliance consultant Tony Catt talks due diligence and research, in preparation for the FCA’s forthcoming thematic reviews.

We have been forewarned that the FCA will focus on due diligence in 2015, and that this may involve a thematic review (see the relevant page on their site here). If the FCA happen to ask you to help with their review, then remember what people say about failing to plan. To help you prepare, I want to present just some basic ideas here, if only to promote discussion. You may already have robust processes in place, but you may still wish to review them in the light of what follows.

Why does a consumer consult an adviser? Obviously, because they believe the adviser must be better informed. Even so, the prospective client should undertake some due diligence beforehand.

Does the adviser have sufficient experience to help them? And the necessary qualifications to advise on certain specialised financial services? Or more simply, do they like and trust the adviser? Did they find the adviser through a source that they trust? And so forth. Due diligence consists both of hard facts – qualifications etc . – and soft facts, such as personality, reputation and chemistry.

Such due diligence is vital because, once a client is working with an adviser, it is often the adviser who ends up making the real decisions. The client may start with a general idea about what they want, but is very likely to be swayed considerably by the advice they are given. It is a position of considerable power that advisers have not always applied to clients’ benefit, and this in turn has damaged the public perception of financial services providers and advisers. Ironically, this effect repeats when advisers interact with compliance consultants – which makes it incredible that compliance remains unregulated. The compliance practitioner can give all sorts of guidance without any liability – it is the registered firm that is liable for any advice given to clients.

So we come to the advice process. After the IDD process, which may complete the due diligence for the client, the due diligence process for the adviser starts with identifying the client. This is primarily a requirement to try and minimise the risk of being involved in financial crime. The Anti-Money Laundering rules state that the client should be identified, while ascertaining the source and ownership of any money being invested or used to buy products. Most Anti Money Laundering training is all about challenging transactions that are unusual, such as the sudden appearance of money in a bank statement. But advisers can only be expected to undertake a reasonable level of detailed investigation, as clients may be upset by excessive investigation. Ultimately, if a client is determined to commit financial crime, they probably will.

After this comes the fact finding process, as complete as possible so as to identify client needs and confirm objectives. Then the adviser gets to the core of why the client requires their services: the research process, to find the correct product and provider to satisfy client objectives. This research will involve a combination of the right searching software plus years of professional and practical experience. Records of all research should be kept, to show clients the extensive process that went into choosing their product, and the rationale behind it.

The research process

Here is a top-line summary of some key factors to consider as part of your research process.


Sourcing software can help you filter down preferred providers and schemes, but that may be only the start of the process. The choice of provider may also be influenced by your experience of the underwriting procedures and services levels of different lenders. Your client’s personal circumstances are also a pivotal factor.


Again, sourcing software can filter down to suitable providers. But remember that critical illness cover is more complex than life Ccover, as different companies use different definitions for conditions. Whole-of-life cover offers different levels of investment potential and premium reviews,  while income protection and private medical insurance may have different claims criteria. Final choices may well involve some knowledge of insurance company underwriting emphases.

Investment and pension funds

The research needed here is considerably more complex. As well as provider and product, there is also the underlying investment to be considered. However, due to the nature of investments, it may be that much of the research has been undertaken already.

Due diligence

All providers produce considerable levels of glossy documents to convince advisers that they need look no further for their investment solutions. Always remember that these documents are produced in-house, so cannot be relied upon as the sole source of information. Third-party research is needed to show why one provider has been chosen over the competition.

Platform research

I undertook some research relating to platforms in August 2014. I discovered that very little third party information was available to make a definitive decision about the merits of the various platform offerings. Probably the most complete research that I was able to generate was using Adviser Asset software. This involved keying in a lot of information. Indeed the most useful application of this was that the information required would be individual to client circumstances, which is entirely in keeping with FCA requirements. I would be happy to hear from anyone interested in sharing the wider findings of my research.

Fund research

Researching funds has been a perennial issue for advisers. Since we are unable to look accurately into the future, we start by looking at past performance. But of course we cannot rely on past performance either. So what can we do? We need to consider the past records of fund managers or firms and their investment processes. The length of tenure of the fund manager and the size of the fund are relevant factors. For advisers who lack the investment knowledge, or take the pragmatic view that this service cannot be provided cost-effectively, it may be preferable to outsource the investment decisions. Remember that the process behind the selection of the funds is the important element of any research undertaken.

Discretionary Fund Managers

The choice of DFM is similar to trying to differentiate between platforms. Again there are providers of third party research available, but there is no past performance information available. The DFMs often make the point that their proposition involves regular personal contact and the bespoke construction of portfolios. It may well be that I will do some research regarding DFM services in the near future.

Remember: if you don’t record it, it didn’t happen

I hope I have provided some food for thought about the due diligence and research that you undertake within your business. After all, most aspects of business represent some level of risk to it. When taking on a new adviser, there is a whole recruitment process. Buying a new service or taking on a new provider will involve research to try to minimise risk at each transaction. And so forth. A vitally important part of undertaking due diligence and research is maintaining records that confirm the research that has been undertaken. Also, when due diligence and research is reviewed, evidence of how this research has been undertaken should be maintained.

The FCA is a risk-based regulator, and will probably only have time to address what it perceives to be the highest risks to the business. So when looking at due diligence, it is unlikely to look at mortgages, but may be interested in equity release. The only protection that may be of interest would be long-term care. As far as investments are concerned, structured products or even UCIS will be top priority, followed by large investments. SIPPs and drawdown will be the priorities in the retirement planning area.

For all types of business, the requirements for records are largely similar:

  • IDD
  • AML information
  • Fact find to show objectives
  • Research – possibly report to client
  • Due diligence regarding provider and funds
  • Illustration
  • Proposal/application
  • Acceptance terms/offer/investment confirmation
  • Suitability letter.

I hope that this has helped you to consider your processes regarding due diligence and research. I would be happy to discuss any of these issues with you in fuller detail.

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