Moving beyond compliance: Suitability Framework 2.0

Under regulations including Consumer Duty and MiFID II, suitability -or appropriateness of advice- is a focus area. Opportunity or threat for financial services?

It’s no surprise that financial organizations are among the world’s most heavily regulated areas of business. Also, the complexity of the operating environment for banks, wealth and asset managers, insurers and other financial services firms is arguably greater today than at any point in the past few decades.

Regulatory changes are both a reflection of these challenges and sometimes a complicating factor. However, by understanding the regulatory landscape and potential changes in the near- to medium-term and embracing the implications for their businesses, firms can unlock new areas of growth and reinforce competitive advantages.

Consumer Duty and MiFID II

In recent years, the European and UK financial markets have been impacted by two key sets of regulation to make them more transparent and to better protect investors: MiFID II in Europe and more recently the Consumer Duty Act in the UK. Both regulations are raising the bar to provide clear standards of consumer protection across financial services, requiring firms to empower and protect investors to achieve good customer outcomes. As financial firms must take all reasonable steps to ensure that a client’s investments align to their objectives and personal circumstances, ‘suitability’ – or appropriateness of advice – has become a key focus area.

Many investment firms in Europe have taken a first step towards a broader analysis, trying to convert all client data into truly suitable advice. This implies answering the following questions:

• To what extent does the data collected contribute to an optimal match between investment products and client profile?
• Does this result in ‘suitability’ according to the regulations in place like MiFID II and Consumer Duty?
• How can processes and systems be implemented in such a way that ‘suitability’ is automatically guaranteed in case of a ‘Goals-Based’ investment advice?

Holistic approach

The suitability framework assures compliancy throughout the whole advice process and beyond, helping financial firms move from product-oriented counsel to a more holistic, client-centric advice. The client really must have a deep understanding why he made a certain investment decision. Once an investment decision has been made, it should be monitored for pro-active client management, high-quality risk management and efficiency.

This paper is not an overview of the regulations, or a “to do” list. Rather, we believe it is helpful to highlight some areas financial services firms will need to manage in complying with the new regulations and to profit from digitization opportunities, including realizing more efficiency and increase advice quality.

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