Welcome to our Blog

Read our latest thoughts and insights

“Research” -v- “due diligence” – What’s the difference?

“Research” -v- “due diligence” – What’s the difference?

We often hear about the need to undertake research and due diligence on the products and services recommended to clients, but what does that mean in practice? Specifically, is undertaking research the same as due diligence, or are the two different?

And this is an important question, because there is confusion in the market about what advisers need to do.

The FCA are clear that research is different from due diligence. They said clearly in the Supervising retail independent advice thematic review (TR14/5), that:

“We expect firms to carry out research on the whole of the market to identify the solution(s) that are in the client’s best interests, then conduct detailed due diligence on the recommended solution(s).”

And they gave examples:

“If a self-invested pension plan (SIPP) was suitable for a particular client, we expect the adviser to research the SIPP market, then carry out due diligence on the selected SIPP. In relation to the platform market, we expect firms to carry out research and draw up a shortlist of platform providers, then carry out due diligence on the shortlist.”

In case this wasn’t clear enough, the FCA also gave this example of good practice:

“Firm Q initially used research tools to distil the whole of the market into a shorter list on the basis of criteria that were relevant to the firm’s clients… The shorter list was then subject to detailed due diligence which resulted in a list of approved providers/funds.”

So research and due diligence are separate requirements and the FCA have been consistent on this over many years – they first set out their views in 2007, with the publication of RPPD – the Responsibilities of Product Providers and Distributors for the Fair Treatment of Customers (PS07/11), and reiterated it in a thematic review in 2016, TR16/1.

The requirements can be summarised as:

(The relevant parts of RPPD, TR14/5, TR16/1 and PROD are set out at the end of this blog for easy reference and comparison)

In short:

  • Research is about understanding and evaluating the product or service
  • Due diligence is about checking out the provider

And that makes sense – a product might pass all your research criteria but, if it’s offered by a “dodgy” provider, it’s unlikely to pass the suitability test. Equally, you may be very happy with a particular provider, but if its products or services don’t pass muster, they’re unlikely to be suitable.

What about PROD?

So that covers RPPD and TR16/1, but what about PROD? Does that change things?

Well actually, no –  the fundamental requirement for separate research and due diligence is the same. The relevant rules are laid out side-by-side below and, aside from a couple of minor terminology changes, the due diligence requirements of PROD 3.3.2G are word-for-word identical with RPPD, which came more than 10 years earlier – a great (if rare) example of consistency of approach over the years by the FCA. .

PROD does add some additional new requirements in terms of documenting the assessment and ongoing monitoring of recommendations, but the core research and due diligence requirements are effectively unchanged.

However, and this is important – whereas RPPD and TR16/1 set out guidance to advisers, PROD contains rules, and we can expect that the FCA will be monitoring how they’re applied over the months and years ahead. Advisers will need to be able to demonstrate their compliance with the PROD rules.

War and peace?

So separate research and due diligence is essential, but how far does this need to go? Does it have to be a “War and Peace” epic? No, the reasonable level will depend on a number of factors and we’ll return to this in another article, along with resources to help you streamline the process, such as online due diligence services.

Extracts of relevant research and due diligence requirements from FCA documents:

RPPD (PS07/11) TR14/5 TR16/1 PROD
1.24 When advising on selection of a provider, Principles 2 and 6 are particularly relevant (Note (18)). In particular, a firm: (1) should consider the nature of the products or services offered by the provider and how they fit with the customer’s needs and risk appetite; (2) should consider what impact the selection of a given provider could have on the customer in terms of charges or the financial strength of the provider, or possibly, where information is available to the distributor, how efficiently and reliably the provider will deal with the distributor or customer at the point of sale (or subsequently, such as when queries/complaints arise, claims are made, or a product reaches maturity). 2 What is independent advice? We expect firms to carry out research on the whole of the market to identify the solution(s) that are in the client’s best interests, then conduct detailed due diligence on the recommended solution(s).   If a self-invested pension plan (SIPP) was suitable for a particular client, we expect the adviser to research the SIPP market, then carry out due diligence on the selected SIPP. In relation to the platform market, we expect firms to carry out research and draw up a shortlist of platform providers, then carry out due diligence on the shortlist.  

4 Guides for firms Example of good practice Firm Q initially used research tools to distil the whole of the market into a shorter list on the basis of criteria that were relevant to the firm’s clients (for example, financial strength). The shorter list was then subject to detailed due diligence which resulted in a list of approved providers/funds.
1.3.ii. Research and due diligence – we use this expression in this paper to refer to the process carried out by the firm to assess (a) the nature of the investment6 , (b) its risks and benefits7 and (c) the provider8 (to establish whether they believe it appropriate to entrust the provider with client assets). The firm needs to understand these factors in order to judge whether the solution is suitable.        

6   The Responsibilities of Providers and Distributors for the Fair Treatment of Customers s1.24(1)
7   FG11/5 s1.16
8   The Responsibilities of Providers and Distributors for the Fair Treatment of Customers s1.24(2)  
3.3.1 R A distributor must: (1) understand the financial instruments it distributes to clients; (2) assess the compatibility of the financial instruments with the needs of the clients to whom it distributes investment services, taking into account the manufacturer’s identified target market of end clients; and (3) ensure that financial instruments are distributed only when this is in the best interests of the client (see  COBS 2.1.1R(1)). [Note: article 24(2) of MiFID]  

3.3.2 G A distributor should consider what impact the selection of a given manufacturer could have on the end client in terms of charges or the financial strength of the manufacturer, or possibly, where information is available to the distributor, how efficiently and reliably the manufacturer will deal with the distributor or end client at the point of sale (or subsequently, such as when queries/complaints arise, claims are made, or a financial instrument reaches maturity).
Avatar
Chris Jones

Comments are closed.