During the review, the Financial Conduct Authority assessed how well firms identify and manage conflicts of interest when using in-house products (IHPs). It defines IHPs as products manufactured by the firm and then placed into customer portfolios, creating a potential conflict of interest.
The regulator said, overall senior management at wealth management firms recognised these risks and had taken steps to manage the conflicts of interest.
However, it also said there were weaknesses in the way firms monitor the way IHPs are used and communicate with consumers.
Robert Taylor, FCA head of wealth management and private banking, said: “We found most firms identified and addressed potential conflicts of interest – however, there is more that they could do to maintain high professional standards.
“We'd like to see all wealth management firms that make significant use of in-house products able to explain how this fits within their wider business strategy and is aligned with their customers’ interests. We'd also like firms to ensure they have clearly explained the use of IHPs to their customers.”
The FCA said it reviewed firms’ business strategies and governance, how well they identified and managed conflicts of interest, their management information, the use of sales targets and remuneration, product selection, and communications with customers.
It found:
• Firms generally recognised potential conflict of interests, and some firms engaged third parties to report on their effectiveness of their controls. Most firms had identified and recorded conflicts of interest that arose in relation to distributing IHPs and had mitigation plans in place
• Although firms were generally clear about the relationship between the distributor and product manufacturer, in some instances, there were inconsistent and ambiguous terms which could leave consumers unclear of exactly what service they were offering and the likely extent to which they would use IHPs
• Several firms with high proportions of assets under management invested in IHPs did not monitor how these were used in customer portfolios
