When onboarding a new adviser firm, investment firms in the UK must adhere to stringent due diligence requirements as laid out by the Financial Conduct Authority (FCA). The FCA’s rules and guidelines aim to ensure that investment firms maintain high standards of integrity, protect client interests, and promote transparency within the financial services industry.
But what are the FCA’s expectations that it expects investment to address when bringing on new adviser firms? We explore the key areas of due diligence below.
1. Assessment of adviser firm’s regulatory status
One of the first steps in the due diligence process is to verify the regulatory status of the adviser firm. The investment firm must ensure that the adviser firm is authorised and regulated by the FCA. This involves checking the firm’s entry on the FCA Register to confirm that it holds the appropriate permissions for the activities it intends to conduct. The investment firm should also verify that there are no enforcement actions or disciplinary records against the adviser firm or its key personnel.2. Financial stability and capital adequacy
The FCA expects investment firms to assess the financial stability of the adviser firm. This includes reviewing the adviser firm’s financial statements, assessing its capital adequacy, and understanding its business model and revenue streams. The investment firm must ensure that the adviser firm has the financial resilience to meet its obligations and continue operations in the event of market fluctuations or other financial stresses. This step is crucial to protect clients and maintain the stability of the broader financial system.3. Governance and internal controls
A thorough evaluation of the adviser firm’s governance structure and internal controls is essential. The FCA expects investment firms to examine the adviser firm’s organisational structure, including the roles and responsibilities of senior management. The firm’s internal policies, such as those related to compliance, risk management, and client asset protection, should also be scrutinised. Investment firms must ensure that the adviser firm has robust procedures in place to manage conflicts of interest, protect client assets, and ensure compliance with relevant regulations.
4. Competence and integrity of key personnel
The FCA places a strong emphasis on the competence and integrity of the individuals involved in delivering advice. Investment firms must conduct background checks on the adviser firm’s key personnel, including directors, senior managers, and advisers. This includes verifying qualifications, experience, and professional history, as well as ensuring that individuals meet the FCA’s fitness and propriety standards. Any history of misconduct or regulatory breaches must be carefully evaluated, as it may indicate potential risks.
5. Client proposition and suitability of advice
Investment firms must assess the adviser firm’s client proposition, including its approach to delivering investment advice. This involves understanding the adviser firm’s target market, the types of products and services it offers, and how it ensures the suitability of its advice to clients. The FCA expects investment firms to verify that the adviser firm has processes in place to assess clients’ needs, risk tolerance, and investment objectives, and to recommend appropriate products accordingly.
6. AML and financial crime prevention measures
Anti-Money Laundering (AML) and financial crime prevention are critical aspects of the FCA’s regulatory framework. Investment firms must ensure that the adviser firm has effective AML policies and procedures in place. This includes conducting client due diligence, monitoring transactions for suspicious activity, and reporting any suspicious transactions to the relevant authorities. The investment firm should also assess the adviser firm’s compliance with other financial crime prevention measures, such as those related to fraud, bribery, and corruption.
7. Data protection and cybersecurity
Given the increasing importance of data protection and cybersecurity, the FCA expects investment firms to evaluate the adviser firm’s measures in these areas. This includes reviewing the firm’s data protection policies, assessing its compliance with the General Data Protection Regulation (GDPR), and ensuring that adequate safeguards are in place to protect client data from unauthorised access or breaches. Investment firms should also assess the adviser firm’s preparedness to respond to cybersecurity incidents.
8. Ongoing monitoring and review
The FCA does not view due diligence as a one-time activity. Investment firms are expected to conduct ongoing monitoring of the adviser firm after onboarding. This involves regular reviews of the adviser firm’s performance, compliance with regulatory requirements, and adherence to the investment firm’s standards. Any significant changes in the adviser firm’s operations, financial condition, or regulatory status should trigger a reassessment of the relationship
9. Documenting the due diligence Process
The FCA expects investment firms to maintain thorough documentation of the due diligence process. This includes records of all checks performed, assessments made, and decisions taken during the onboarding process. Proper documentation not only provides evidence of compliance with regulatory requirements but also serves as a valuable reference in the event of future disputes or regulatory inquiries.
Conclusion
The FCA’s expectations for due diligence in the onboarding of new adviser firms are comprehensive and aimed at ensuring that investment firms maintain high standards of conduct and protect client interests. By rigorously assessing the regulatory status, financial stability, governance, competence, and other key aspects of adviser firms, investment firms can mitigate risks and contribute to a more stable and transparent financial services industry. Adhering to these due diligence requirements is not only a regulatory obligation but also a vital component of good business practice in the investment industry.