UK: Funds: Timely Reminders On Product Design, Marketing, Assessing Suitability And Selling

Last Updated: 26 January 2011
Article by Margaret Chamberlain, Tim Lewis and Jane Tuckley

Today's £7.7 million fine on Barclays Bank plc ("Barclays"), the highest so far imposed by the FSA for retail failings, sends a clear warning to firms that shortcomings in the process of selling funds to retail investors will not be tolerated and will be subject to severe punishment. The case comes hot on the heels of two FSA guidance consultations that are relevant to the retail sector: one on assessing suitability and the other on financial promotions.

The Barclays case – unsuitable sales

The FSA's action against Barclays is of particular relevance to firms that are subject to the obligation to assess suitability under COBS 9.2 - i.e. advisers who make personal recommendations and discretionary investment managers.

The case related to sales of two UCITS funds offered by Aviva, The Global Balanced Income Fund ("the Balanced Fund") and the Global Cautious Income Fund ("the Cautious Fund") (both, in fact, sub-funds of the Aviva Investors Funds ICVC) between July 2006 and November 2008. The regulator found that, in a breach of FSA Principle 9 (Customers; relationships of trust) and the relevant conduct of business rules (including COBS 9.2.1R), Barclays had failed to take reasonable care to ensure that the advice given to retail customers was suitable. Barclays has already paid approximately £17 million in compensation to customers and the FSA estimates that it will have to pay a further amount of between £20 million and £42 million in compensation.

A number of clear lessons emerge from the Barclays case for those firms involved in designing and selling retail funds to the public:

  • It is important for firms to take care during the process of product design, development and approval and not to allow complacency to creep into that process. In the Barclays case, the two funds were modelled on a previous product that had been jointly developed by Barclays and Morley Fund Services Limited. Because of this the new funds were subject to an abbreviated approval process, despite the fact that there were differences in investment profile and risk classification.
  • Firms must ensure that their training of relevant staff is adequate: o From the training materials staff should be able to understand the types of customers for which a particular product is suitable.
    • The training should explain the risks associated with a particular product and not give a misleading impression to the adviser.
    • Training must be tailored to and updated for the particular products in question – do not assume that because a product is similar to a previous one that the training given in relation to that previous product will be sufficient.
  • Firms must also ensure that regular sales briefs and product updates which are sent to their sales advisers are accurate and balanced – in Barclays' case, these materials were deficient because they only referred to the potential benefits of investing in the Aviva funds and did not refer to any of the risks. Consequently, the sales advisers were not alerted to risk factors which ought to have been passed on as warnings to the customers.
  • Product brochures and other materials given to clients must contain adequate information, including clear information about the nature and levels of risk associated with a particular product. Risk warnings must be sufficiently prominent. In Barclays' case, for instance, the product material did not sufficiently explain the extent to which investment in the Aviva Funds was linked to fluctuations in the stock market; consequently, for those investors who were looking to the products for the purposes of drawing income, there was an insufficient explanation of the risk of capital loss due to stock market fluctuations and therefore the reduction in the production of income. It is significant that the FSA felt that Barclays, as distributor, had a responsibility regarding the content of customer literature. It said that, since Barclays was involved in the process of reviewing the documentation and had detailed knowledge about the funds and the nature of its customer base, it should have done more to ensure that the documents were balanced and explained the risks (despite the fact that the documents were issued and approved by Morley).
  • Firms must ensure that their sales monitoring and due diligence processes are robust: it is essential that firms are able to detect potentially unsuitable sales quickly and, once identified, ensure that appropriate remedial measures are put in place. The compliance function and product risk committee of Barclays had, in fact, identified a number of risks associated with the previous product on which the Aviva funds had been modelled and which were therefore relevant to the suitability assessment: critically, however, these findings were not appropriately escalated and were not explained to sales advisers or customers.

The FSA's Final Notice against Barclays is here.

FSA guidance consultation: assessing suitability

The FSA's guidance consultation "Assessing suitability: Establishing the risk a customer is willing and able to take and making a suitable investment selection" was issued earlier this month. The guidance consultation is aimed at investment advisers and private client discretionary wealth managers – and also at the providers of risk-profiling and asset-allocation tools, including those provided as part of platform.

The guidance consultation focuses, in the context of the wider suitability assessment requirements, on the obligation which requires firms to asses the risk a customer is willing and able to take – i.e. the obligation in COBS 9.2.2R (amongst other things) to take account of a customer's investment objectives (e.g. regarding his preferences regarding risk taking and risk profile) and ensure that he is able financially able to bear any related investment risks consistent with his investment objectives.

In outline, some of the key messages which emerge from the guidance consultation include the following:

  • Firms must have a robust process for assessing the risk which a customer is willing and able to take – this includes assessing his capacity for loss (i.e. the ability to absorb falls in the value of an investment), identifying whether a customer is best suited to placing his money in cash deposits (i.e. because he is not willing or able to accept the risk of loss to capital) and interpreting information from the customer on a "fact find" appropriately (i.e. by having clear, fair and not misleading question and answer options and not attributing inappropriate weighting to certain answers).
  • Firms should exercise caution when using risk-profiling and asset-allocation tools – while the FSA accepts that these can be useful, it warns that they "often have limitations" which mean that there are circumstances in which "they may produce flawed results". Firms therefore need to identify any limitations associated with such tools and ensure that these are addressed and mitigated in the suitability assessment process – the tools must be fit for purpose.
  • Firms must have a robust and flexible process for ensuring that investment selections are suitable in the light of a customer's investment objectives and financial situation – the FSA is concerned that, even where firms correctly assess a customer's risk profile, the product or portfolio recommended or invested in does not always match the profile;
  • Firms should not just focus on the risk which a customer is willing to face – other needs, objectives and circumstances must be taken into account.
  • Firms must ensure that they themselves understand a product and the risks associated with it before recommending or selecting it as suitable for a customer!

The FSA's guidance consultation on assessing suitability is here.

Consultation closes on 28 January 2011.

FSA guidance consultation: financial promotion

The FSA's guidance consultation is aimed at fund managers and other persons approving financial promotions (particularly "image" advertisements, or advertisements which deal with past performance). While not expressly confined to the retail sector as such, this is the principal focus of the guidance.

The guidance consultation addresses a number of points, including the following:

  • There is a reminder about the key issues relating to the presentation of past performance information – including warnings regarding the use of simulated and actual past-performance data within a single communication, making comparisons with other products and references to the winning of awards.
  • The FSA endeavours to draw a distinction between "image advertising" and what it refers to as "brand advertising". In the latter case, while the advertising focuses on the firm's brand, it may also refer to and promote particular products and services. The FSA argues that "image advertisements" are narrower and consist only of information about the firm, rather than promotion of the firm and its products. The message for firms is that they should not assume that because an advertisement is a high-level, "brand advertisement" that it is an "image advertisement" (which would be subject to exemptions from the COBS financial promotion rules).
  • Firms must consider what the FSA refers to as the "customer journey" when designing their promotional material – particularly in the context of a customer's "journey" through a firm's website. The journey itself must be clear – i.e. so that the customer receives fair information along the way.
  • The FSA appears to be averse to what it calls the use of a "risk sandwich" in financial promotions – i.e. a promotion which includes a section on the benefits of a particular product of service, followed by a section on risk warnings and finished off with another section on benefits. Firms are reminded that they must not hide or diminish warnings.

The FSA's financial promotion guidance is here.

Consultation closes on 25 February 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions