The recent fine issued by the FSA against IFA Moneywise for advice failings in relation to platforms was the first high profile enforcement action by FSA in this area but it is unlikely to be the last and should not have come as a surprise.
The FSA sounded warning shots in March in DP10/2 on the RDR and platforms and in the findings of its thematic review on platforms.
In these papers, the FSA makes its intentions quite clear by saying “the high incidence of failings at certain firms underlined the need for vigilance, particularly as platform use is set to increase further” and “evidence of weak systems and controls at many firms highlighting the need for adviser firms to review and implement strong oversight and management functions when introducing platforms into their business model”.
In addition, the FSA stated: “In light of the risks to customers and unacceptable practices identified, platforms advice will form a supervisory priority in the future. And where we find unsuitable advice and weak systems and controls we will take tough regulatory action.”
The FSA has correctly identified that the use of platforms will form a key part of many firms’ transition to an RDR-compliant business model of adviser-charging alongside what the FSA calls “portfolio advice services”, that is, ongoing investment advice and periodic reviews and moving away from a more traditional transactional model.
The FSA’s main concern is that firms are putting the cart before the horse and rolling out the use of platforms across the business before they are ready to do so, in particular, it seems concerned firms are not ensuring that:
- they have reviewed their own risk management systems and controls;
- customers’ interests continue to be put first;
- the firms’ own advisers fully understand the reasons for recommending platforms and are able to explain this to clients; and
- disclosure documents clearly explain to customers the benefits and charges associated with platforms.
The clear message to firms is that when making the transition for their business through the RDR they must:
- conduct a review of all their internal systems and controls;
- consider the implications of their proposed solutions on those systems and controls;
- ensure that before solutions are rolled out, all the advisers fully understand the thinking and rationale behind the solutions to a sufficient extent that they can explain it properly to clients and identify the correct solution for each individual client; and
- crucially, firms and advisers can identify when a solution may not be appropriate for a particular client.
Although the FSA has said that, after the RDR, a firm can use only one platform and remain independent, it can only do this if the firm’s client base is “homogenous” and it is likely that many firms will struggle to justify using the same platform solution for every client.
In terms of ensuring systems and controls are reviewed and sufficient adviser training has taken place before a platform solution is rolled out, there are several different ways to do this and many external providers are offering differing levels of assistance.
What is clear following the Moneywise fine is that if you do not adopt this approach and the FSA comes knocking, you could find yourself struggling to avoid formal enforcement action and/or an expensive skilled person’s report and past business review.
What should senior management be doing?
From a compliance perspective, senior management need to consider what added value placing their clients on a platform will bring.
The benefits to the business are obvious but, in many cases, the benefits to the client are a little less so.
Senior management need to consider who their platform proposition is aimed at and how the client will benefit from its use.
The charges on many platforms contain an element of fixed costs which can, when expressed as a percentage of a small fund value and combined with fund charges, dealing costs and adviser remuneration, make the overall cost very high.
Where a client is being moved with a resulting increase in costs, it is important to weigh up the advantages of this increase in relation to the client’s objectives, investment timescale and attitude to investment risk.
It might be that management introduces a companywide policy on what they consider appropriate. This might include:
- a minimum fund size to access the platform proposition
- a level of increase in charges above which the client should not be moved
Certain cases (with the parameters set by senior management) must be submitted to the compliance manager for approval prior to the transaction taking place.
In doing this, the firm is, in effect, setting out its own senior management systems and controls and demonstrating that careful consideration has been given to moving clients on to a platform.
The majority of platform money will originate from existing investments and charges are therefore not the only consideration when introducing a platform.
Senior management should consider their policy and views on the level of exit penalties, tax, loss of age allowance, etc, that they might consider acceptable in order to access their platform proposition.
The firm might also consider introducing levels above which tax or penalties outweigh the benefits of the platform.
The documentation of the firm’s view on all of these points is key in demonstrating to FSA the level of control senior management has over the running of its business and will go a long way to alleviating any potential concerns the FSA might have.
The final important point to remember is that company policy is only as good as the training that accompanies it.
Senior management must ensure all staff (not just client-facing staff) are familiar and have been trained on the use of the platform proposition and that this training is fully documented and repeated on a regular basis.