by Amar Bisht
Head of Wealth Strategy and Advisory
July 23, 2018
Many Private Banks have invested in costly suitability enhancement programs that have not delivered the expected results. For suitability programs to succeed and deliver the desired outcomes, they must be designed to assist private bankers and investment advisors and should not be focused on merely tightening controls. In our view, an optimised suitability implementation must incorporate industry proven best practices to ensure success.
Conversations with COOs of Private Banks have shown time and again that these executives are focused on getting investment suitability right. Their concerns persist even though Private Banks have already allocated substantial resources to suitability enhancement programs. The changes initiated have been significant with sales processes revamped and additional risk and compliance personnel hired. Despite the spend on suitability, Private Banks are still not fully deriving the benefits of their investments and only a select few appear to be getting suitability right. The lack of success can be attributed to an ineffective implementation approach that ignores key best practices required to achieve the desired results.
The starting point for getting suitability right is for Private Banks to adopt a robust suitability framework that encompasses five dimensions – client risk profiling, product risk rating, pre-trade checks and disclosures, trade surveillance and an adapted organisational culture.
Orbium’s framework incorporates lessons learned and stresses on the importance of a holistic approach by avoiding the creation of silos in departments with competing priorities. The emphasis is on embracing automation, where appropriate, across all five dimensions. The good news is that many COOs are now convinced about the importance of a holistic framework and the automation debate is also settled. Our deliberations with COOs are now geared towards incorporating industry best practices in suitability implementation.
So why are suitability implementations not working? Based on our experience on multiple mandates, we share three critical considerations which can help ensure a successful implementation.
To date, suitability enhancement programs remain largely reactive. We have observed that many Private Banks launch enhancement programmes after internal or external inspections. In most cases, the programmes’ mandate is to work through a checklist of findings and remediation items and the project team is pressed for time to meet deadlines. The enhancements are often driven with limited front office participation and ease of use quickly becomes an afterthought. The results are inevitably inflexible solutions that fall far short of user expectations and deliver poor user experience. Ultimately this approach leaves the front office staff disgruntled at best, or strongly opposed to the solution at worst. In our experience, these outcomes can be avoided if from the outset, front office users are actively engaged and play a vital role in the programmes.
We observe that historically banks have built bespoke inhouse suitability solutions. Such an approach can quickly unravel as some inhouse solutions were never designed to cater to complex suitability obligations that are now becoming prevalent. We have seen examples in the industry where simple changes in suitability rules can take up to six months to implement.
Private Banks are rapidly building digital capabilities and accelerating the adoption of digital channels. This presents a unique opportunity for Banks to build regulatory safeguards into their digital solutions and leverage the lessons learned previously.
We observe that many Private Banks are making a push for digital engagement with clients and are increasing the breadth of their products available online. This digital push must consider and incorporate the guidance provided by regulators on the design and operation of online and digital platforms.
In late March, the Securities and Future Commission (SFC) – Hong Kong, released consultation conclusions on proposed Guidelines on Online Distribution and Advisory Platform.
There is a lot at stake in rolling out a suitability enhancement programmes. Our experience and insights suggest that Private Banks undertaking such a programme maximise their chance of success by designing solutions that enhance the front office ease of use and complement in-house capabilities by embracing an ecosystem approach.
Banks that are willing to break away from the typical checklist approach to suitability programmes will gain a strategic advantage enabling their relationship managers and investment advisors to provide better client experiences while meeting suitability obligations.
As observed in the industry, poor implementation approaches prove costly in the long term with delays, cost overruns and have even in some cases led to expensive remediation exercises. For Banks looking to tighten their suitability regime it is imperative to move from frameworks to accelerated implementation – and to do so now.