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    DFSA Suitability Thematic Review

    The Findings, and Required Enhancements

    Between 2019/2020, the DFSA’s Supervision Team undertook a series of thematic reviews on the DIFC suitability-related systems and controls. In undertaking the review, the DFSA selected a diverse sample of regulated firms that undertook the following Financial Services activities:

    • Advising on Financial Products, and /or
    • Managing Assets.

    On 4th March 2021, the DFSA issued their findings of the review which included several common issues that require immediate attention. Below are the key issues that compliance departments must consider and/or enhance to comply with the DFSA’s expectations:

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    Proper Suitability Assessments

    • A proper suitability assessment must include the Firm’s assessment of the merits or reasonable basis on advising the client on a particular financial product.
    • Firm’s must be able to demonstrate the entire suitability process and provide evidence of the rationale in making the assessment.
    • Suitability forms must demonstrate an appropriate assessment of the client’s attributes before making the recommendations.
    • Periodic reviews of the client’s suitability of the products or services must be undertaken.
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    Enhancements of Control Documents

    • Firms should not only reproduce the DFSA rules regarding suitability within their respective control documents.
    • Further policies and procedures are required to guide employees on how to assess suitability.
    • These policies and procedures must demonstrate the Firm’s approach to what constitutes merits and reasonable basis before making the recommendations.
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    Suitability Forms Must Be Client Driven, Not Product Driven

    • Many Firms had detailed suitability forms; however, they were mostly product driven as opposed to client driven. These are generally tick-box exercises and then conclude why a particular product maybe suitable for the client.
    • Suitability forms are required to demonstrate an analysis to establish a rationale whether a financial product is necessary or appropriate for the client at that particular time.
    • Once the above is undertaken, the Firm may provide a suitable product to fulfill the client’s needs.
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    The Weaknesses in Model Portfolio Approaches or the Firm’s Specified Strategy

    • Firms that manage client portfolios on a discretionary basis must not fit the client into the Firms own portfolio model or the Firms specified strategy. Rather, it must assess whether that strategy is suitable for the client, in his or her current position.
    • Model portfolio approaches or strategies can form the foundation of assisting a client, but must always refer back to the reasonable basis and merits (as outlined above) before executing a transaction.
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    Firm’s Must Not Exclude 'sell' From Their Suitability Framework

    • Firms must not exclude the ‘selling’ of a financial product from assessing the client’s suitability.
    • Firms are reminded that suitability frameworks must include reference to both ‘buy’ and ‘sell’ advice and where appropriate, recommendations not to sell financial products.
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    Investment Management Agreements are not Solely Sufficient From Assessing Suitability

    • Firms who manage discretionary portfolios for their clients often have suitability assessments within the Investment Management Agreements (IMA). Some Firms did not have separate suitability assessments.
    • Firms are reminded that IMA’s may contain a variety of investments across different asset classes that may differ from time to time which may not be suitable for the client. Therefore, a separate suitability assessment, in addition to the IMA may be required to be implemented.
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    Record Keeping for Suitability Assessments

    • Firms are reminded to maintain detailed records of suitability assessments and appropriate evidence.
    • Firms are further reminded that DFSA expect records to be kept for six years after the mandate is closed, ready for any DFSA’s inspection.
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    Difference Between Execution Only and Advised Transactions

    • Firms should be able to document the difference between execution-only transactions to advised transactions. The DFSA noted several firms that were not able to differentiate between the two.
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    Ongoing Suitability Assessments

    • Firms must review suitability on a periodic basis, along with the regular KYC reviews. Many Firms reviewed the KYC documents, but failed to review the client’s suitability to continue with the service provided.

    What should firms do immediately

    The above are just some are of the suitability enhancements that the compliance departments need to be aware of. Firms should review the present framework to ensure the DFSA’s expectations are met.  The policies should include matters such as suitability assessments, practical guides, reviews and template documents for which employees of the Firms are able to follow.

    How We Can Help

    Our team consists of UK qualified lawyers and compliance officers that have assisted numerous Firm’s in Conduct and Business matters including enhancing their suitability frameworks. We have formulated detailed assessments and remedial plans to address all areas of weakness.

    We offer a free initial assessment of your suitability framework that can help you assess your suitability analysis for robustness. Thereafter, we can help you plan and implement efficient policies, processes to complement your existing suitability framework to ensure compliance with the DFSA expectations.

    Should you require any assistance regarding your current processes, please contact our office on +971 4 320 7322 or email us at info@unitasadvisory.com and one of our consultants will be happy to assist.