In response to increasing concerns around investment advice, in early 2017, the Jersey Financial Services Commission (JFSC) launched an awareness campaign highlighting the potential dangers of high-risk investments and mis-selling. As a continuation of the on-going work in this area, the JFSC carried out ten themed onsite examinations based on a cross section of Jersey-based investment firms which are licensed to provide both investment advice and discretionary investment management services.
This review was conducted in the context of an increase in the number of investment mis-selling and ensuing enforcement actions in recent years, which has placed the suitability of investments high on the regulator’s agenda.
While some of the findings are specific to investment business licensees, others are applicable to all regulated businesses and are recurring and consistent with the thematic examinations conducted on trust company businesses.
Please click here to see a summary of the practices identified by the JFSC as part of its thematic review on suitability of investments. The findings can be broadly categorized into Conduct of Business and Compliance Findings, the key ones of which are listed below. Many of these findings are common to the onsite examination feedback results from 2014 and 2015, which will no doubt be a cause of concern to the JFSC.
Conduct of Business
Knowledge of client and advice
Knowledge of a client’s circumstances is key to providing suitable advice. However, the fact-finding process in a number of investment firms was found to be deficient in terms of a lack of depth of questioning (capacity for loss, risk appetite), documentation was amended without any explanation or version control. There appeared to be an apparent unwillingness to ask necessary questions about financial circumstances on the grounds that they were intrusive.
Building on this, the JFSC identified that suitability letters (or Reasons Why Letters), frequently used generic wording which failed to explain how asset allocation had been arrived at, how the product aligned to the client’s risk tolerance and other failings which tied back to an inadequate fact-find and lack of a true understanding of the client’s financial status. Originally, these suitability letters were supposed to document the rationale for selection of specific investment products.
Defined benefit pension scheme transfers
While there is no formal pension regulation like the UK, the investment advice provided to pension holders is a regulated activity. Given the irreversible and significant financial effects of transferring out of a defined benefit scheme, the decision to do so should be supported by the most carefully considered advice. Findings included a lack of financial projections to identify the future investment returns required to match the relinquished guaranteed benefit levels, insufficient explanations of the impact on benefits and a failure to establish future income requirements.
Fees and value for money across all sectors remains a key issue but compliance with the letter and spirit of the Code of Practice which is effectively designed to result in a ‘no surprises’ policy was considered less than comprehensive with evidence of inconsistent and varying fee structures between clients as well as discrepancies between stated terms and actual charges.
As part of the increased focus on investment advice and potential mis-selling, vulnerable clients and the protections afforded to them have become a key theme for the JFSC. Identifying such clients and formally implementing controls and review processes was not always embedded into the business’ procedures.
As an ongoing check to ensure advice is suitable, that risk assessments are adequate and the client’s investment strategy is appropriate, it was found that results from the periodic review process were not reported to senior management, nor were they actively managed by individuals other than the client advisors, which led to ineffective application of the process.
Policies and procedures and record keeping
Clear, relevant and current policies and procedures are key in ensuring that organizations adhere to regulatory requirements. The evidence identified by the JFSC found that there were instances where poor controls over the ownership and maintenance of policies and procedures, led to material omissions and out of date standards. On a similar theme, the JFSC identified examples of poor documentation of discussions with clients and disorderly files, with key documents missing.
A firm’s Compliance Officer is responsible for ensuring appropriate monitoring of operational performance and managing compliance and regulatory risk. The JFSC observed that the Compliance Officer was not always in attendance at key meetings. In respect of the Board’s oversight of the compliance function, reports were found to be insufficiently detailed, were sporadic in terms of timing of their submissions and did not have definitive target dates to complete action points.
Risk assessments, PEPs and CDD
The JFSC identified that on several occasions investment firms had failed to undertake adequate, or in some instances, any, risk assessments. Linked to this topic, Politically Exposed Persons (PEP) procedures were sometimes not drafted to fully recognize the requirements of the Money Laundering Order and the Handbook, including recognizing that it is not possible to de-PEP a PEP once classified as such. Customer Due Diligence (CDD) deficiencies were also identified whereby red flags contained within the documentation reviewed did not support the low risk classification assigned. In addition, the confusion surrounding source of funds and source of wealth have also resurfaced - a basic misconception which appears to continue to survive, despite much attention being devoted to the topic.
How Duff & Phelps Can Help
Regulated firms should review the areas highlighted by the JFSC in their key observations to make sure their arrangements are in line with regulatory expectations.
Our experienced Compliance and Regulatory Consulting team, based in the Channel Islands and globally, can assist your firm with meeting the JFSC’s regulatory standards through:
- Policies and procedures development
Review of governance arrangements and senior management arrangements
Annual and ongoing reviews of compliance arrangements, systems and controls (including red-flag reports)
Regulatory remediation project management and technical guidance
Compliance and regulatory secondments to assist with temporary resource gaps
Compliance infrastructure advisory
Staff training on regulatory matters
Mock regulatory audits, pre-enforcement and supervisory reviews
Support with on-site regulator visits, examinations and enforcement investigations
Advice on preparing for regulatory changes
Regulatory update notifications