Following its recent asset management market study, the Financial Conduct Authority (FCA) has called for an investigation by the Competition and Markets Authority (CMA) into the investment consultant sector and recommended that investment consultants are brought into its regulatory perimeter. Its main concerns relate to possible competition issues and conflicts of interest, with some firms offering both advisory and fiduciary management services, accepting gifts and hospitality, and a lack of disclosure of information relating to performance and services provided.
Although the investment consultants examined as part of this market study were able to demonstrate some arrangements to mitigate conduct risk, the FCA stated that such provisions do not fully address its concerns and a full investigation of the sector is required to put appropriate remedies in place.
With the risk of being subject to formal regulatory investigation, investment consultants should be on the front foot to avoid potentially costly FCA-mandated remediation action. Investment consultants should focus on enhancing their processes and controls to ensure that appropriate and effective governance and control frameworks are in place. The following key principles should be considered:
These recommendations are based on current financial services regulatory best practices and also consider forthcoming regulatory changes relating to conduct of business. Being proactive in implementing these principles will help investment consultants address the majority of the concerns raised by the FCA and, if effectively embedded, avoid potentially expensive and invasive regulation action in future.
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