Complex and high-risk investments can play a role in meeting certain clients’ needs, but they also carry an increased risk of harm.
While this may seem obvious, firms are still recommending such investments to retail clients who fall outside the target market set by the product manufacturer or provider.
The FCA is picking up on these issues, resulting in regulatory scrutiny, costly client remediation work, and, in some cases, enforcement action.
To avoid these risks, it’s essential for firms to have robust target market assessment procedures in place, ensuring that any products recommended are appropriate for the clients they serve.
A target market refers to a group of clients with shared characteristics, needs, and objectives for whom a product or service is designed. Most threesixty clients act as distributors, meaning they recommend third-party products and services to their own clients rather than manufacture products themselves.
Manufacturers must define the intended target market for each product and ensure distributors have sufficient information to sell it appropriately. As a distributor, your firm must review this information carefully, assessing how it aligns with your own client base.
Manufacturers typically provide target market information through a target market statement or, for investment products, the European MiFID Template (EMT), widely used by UK fund managers and platforms.
These documents outline the types of customers for whom the product is suitable, types of customers for whom the product is not suitable and recommended distribution strategy.
Providers often define client characteristics in terms of investment goals, minimum investment levels, experience, risk tolerance, and time horizon.
Risk and complexity play a key role in determining suitability. For example, products designed for mass-market retail distribution, such as many UCITS funds, typically have a broad target market.
While target market assessment is important for all products, it is particularly critical when dealing with complex or high-risk investments
In contrast, higher-risk or more complex products are suitable for a much narrower group—clients who understand the risks and complexities and can benefit from the product’s features.
Distribution strategies for these products may be more restricted, such as being available only through advised sales, for experienced investors, or within discretionary portfolios.
While target market assessment is important for all products, it is particularly critical when dealing with complex or high-risk investments.
Firms must take a structured approach to assessing and approving products before they are made available to advisers.
A centralised research and due diligence process is essential. This ensures that only products appropriate for the firm’s target market are considered for distribution.
Advisers will still need to conduct client-specific suitability assessments, but a firm-wide approach ensures consistency and compliance with product governance obligations.
Your firm should never recommend a product it does not fully understand
Under FCA rules, manufacturers must define target markets at a sufficiently granular level, considering; the characteristics, risk profile, and nature of the product; all relevant groups of customers, including those with characteristics of vulnerability, and their ability to understand the product.
When assessing target market information, firms should be alert to inconsistencies or unclear details. Providers do not always get this right, and their explanations may not always be clear. If anything seems unclear, seek clarification from the provider.
Crucially, your firm should never recommend a product it does not fully understand.
A key part of suitability assessment—especially for complex products—is evaluating a client’s knowledge and experience. This is particularly important when the target market includes informed or advanced investors.
For example, the EMT defines an ‘advanced investor’ as someone who meets one or more of the following criteria:
- A strong knowledge of financial products and transactions.
- Industry experience, or access to professional investment advice or discretionary portfolio management
When assigning this classification, product manufacturers assess the qualitative aspects of the product.
This could mean that the product:
- Requires background knowledge or experience in the underlying markets or strategies.
- Has complex payout structures or breakpoints.
- Includes complicated investment strategies that many retail investors may struggle to understand.
- Is subject to increased regulatory attention.
Firms must assess knowledge and experience at both firm level—when determining whether a product is suitable for distribution—and adviser level, as part of the suitability assessment for individual clients.
Advisers should evaluate a client’s familiarity with similar products, their transaction history, and their level of education or professional background. This assessment should be documented, with findings clearly reflected in the suitability report.
If any inconsistencies arise—such as a client’s risk appetite not aligning with their investment experience—these should be discussed and documented before proceeding with a recommendation.
Target market assessment is not a ‘once and done’ exercise. Firms must regularly review their processes to ensure that product distribution remains aligned with the intended target market.
This should be done through regular file reviews, periodic due diligence on products and providers and corrective action where misalignment is identified.
Tony Lewis is a policy consultant at threesixty services
