"Suitability" is a word that cannot be avoided in private client management and the Asian industry is no exception. The authors of this article drill into the details of how the sector must raise its game.

One of the oft-repeated words in global wealth management today is “suitability”, relating as it does to ensuring clients have products and services that meet their needs, thereby avoiding mis-selling wrangles and costly litigation and regulatory action. It is, of course, debatable how suitability can be best judged; an overly-prescriptive test of what is a “suitable” investment can produce bland, low-return products and a sort of stifling financial “nanny state”. Regardless of the rights and wrongs here, the focus on suitability is here to stay. 

In Asia, the focus on the topic is growing. Earlier this year, for example, Singapore set out steps it is taking to reduce conflicts of interest in the financial advisory sector. The kind of regulatory changes seen in the UK, with legislation that cracks down on trail commission payments and demands evidence of how clients were assessed for suitable products and services, is finding an echo in other parts of the world. The suitability issue is a major bone of contention in the US market, for example.
In this article, Jacqueline Teoh, head of business consulting (Asia-Pacific), Orbium, and colleague Amar Bisht, wealth strategy and advisory, business consulting services, Orbium, go into the subject in more detail. Orbium is a business and technology consultancy that focuses exclusively on financial services, such as banks. It has offices worldwide in Singapore, Hong Kong, Frankfurt, Zurich, London, Paris, Manila, Luxembourg, Geneva, Sydney and Warsaw.

The editors of this publication are delighted to publish this article and invite readers to respond with their own views as debate is sure to continue around the suitability topic.

Investment suitability has long been a preoccupation for private banks in Asia. Not least due to the accusations of mis-selling levelled by clients which have frequently led to lawsuits. In response, regulators in Singapore and Hong Kong have sharpened their focus on suitability obligations, rolling out prescriptive guidelines and subjecting private banks to periodic supervisory reviews. And yet, private banks in the region are still struggling to get investment suitability right. The reason being that implementing robust suitability is not a straightforward process. 

To date, private banks have dealt with suitability by adding piecemeal fixes instead of developing a client-centric sales process with embedded suitability obligations. As regulations have layered on top of each other, so too have the processes to deal with the new requirements. In order to meet the guidelines, private banks have, for example, relied on pre-trade manual checks which have led to high exception handling and an arbitrary implementation of the rules.

What’s more, the burden of legacy systems and processes at many private banks has frequently led to the assumption that certain complicated issues simply cannot be resolved. For instance, client profiling remains inadequate as it ignores crucial risk factors that private banks wrongly believe they can’t update. Surveillance of trade checks also relies on manual processes that are error prone. Ultimately, this approach leads to a costly remediation exercise. 

Finally, private banks haven’t adopted the right organisational and incentive structures. Setting up a dedicated project team to drive the change programme forward draws staff away from BAU roles. As a result, private banks have tended to prioritise short-term fixes that exacerbate the problem in the longer term.

What’s clear is that these challenges must be tackled if private banks are to introduce robust suitability. With further regulation on the horizon, the situation becomes even more urgent. Asia’s private banks must now knuckle down to the task of meeting their suitability obligations. The status quo is not sustainable. 

The key to meeting their obligations is for private banks to set up and adopt an end-to-end framework, which is embedded into the sales and advisory process, and encompasses the five key areas of suitability: 
- client profiling – determine client risk profiles taking into account all relevant factors; 
- product rating – assess product risks and assign an appropriate rating; 
- controls and disclosures – guard against unsuitable transactions and disclose relevant risks; 
- surveillance – ensure the effectiveness of internal controls; 
- organisational culture – set up appropriate structure and staff incentives.

But how should private banks go about establishing such a suitability framework? There are a number of factors to consider.

With all the piecemeal fixes to date, private banks need to focus on getting the approach and solution right the first time to avoid the re-work that has characterised many private banks’ suitability implementations. Throughout this process, a key mantra must always be: "keep it client-centric". If private banks simply approach their suitability requirements as a regulatory tick-box exercise, they will not succeed. 

Automation is critical. Private banks need to build intelligence into their banking platform at every stage of the selling process. Relationship managers must be alerted to potential risk mismatches and concentration risk, which can then be discussed with the client. Automated suitability dashboards that capture control violations increase visibility to systematic issues. Controls that prevent relationship managers from trading products that they have not been trained on can reduce mis-selling.

The final piece of the puzzle for a successful roll-out is about getting the organisation mobilised and ready to meet suitability obligations. Critically, the incentive structure for relationship managers must not encourage them to push riskier products to clients. With a new wave of suitability regulations on the horizon, the pressure is on. 

The Monetary Authority of Singapore, for example, is enhancing its regulatory framework for safeguarding investors’ interests. In 2016, amendments to the Securities and Futures Act will be tabled in parliament. Accredited investors will have the option to benefit from the full range of safeguards applicable to retail investors. Furthermore, the MAS is still reviewing feedback on its proposal to introduce a complexity-risk ratings framework for investment products and for these ratings to be disclosed to investors.

With private banks in Asia already struggling with existing suitability requirements, these anticipated updates to the regulation will pile even more pressure on the industry. Private banks must act promptly to put in place an effective long-term strategy to meet their investment suitability obligations if they are to avoid the scrutiny of the regulators and deliver a better client service.