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Control points

After the first IFA fine over platforms, FSA conduct and risk division supervisor Rory Percival gives an overview of the key issues to be considered when using platforms

“Firms that move to platform-based investment models need to ensure their advisers are properly trained and understand the nature of all of the underlying investments. They must also make sure they are properly supported by adequate compliance arrangements.”

These are the words of FSA director of enforcement and financial crime Margaret Cole following Moneywise IFA’s fine last week.

The case came as a result of a thematic review which assessed the way advisers used platforms. It considered whether advice offered by firms which use platforms was suitable and if disclosures to clients were clear, fair and not misleading. The findings were published in March along with a good and poor practice report.

Since then, we have seen good progress being made, with the industry engaging with us over the issues identified. We are keen to see platforms used appropriately so that advisers are offering valued services to customers. Therefore, if you already use a platform or are looking to introduce a platform into your business, this will give you a quick overview of some of the key issues.

Platforms can be used in a number of different ways but for many advisers they are an essential tool that underpins the services offered to a customer. For example, some advisers use platforms to deliver portfolio advice services. This typically involves the adviser choosing an asset allocation, recommending a range of investments and offering ongoing reviews and advice. While these services do not amount to discretionary portfolio management, they are a significant departure for many firms’ making the transition from transactional sales models.

The evolution in advice services brought about by platforms can lead to improved outcomes for customers but it also gives rise to some risks. There is more detail of these risks in the report published following our thematic review but here I will focus on just two – systems and controls and individual suitability.

Systems and controls
It is vital that systems and controls are kept up to date. This is particularly so when making changes to your business model such as adopting a platform and offering portfolio advice services as it is likely to involve different risks that need to be managed to ensure customers are treated fairly. For example, if you now focus on providing ongoing services and have moved away from transactional sales, is it still appropriate to rely ent-irely on file reviews selected from the transactions recorded on the new business register?

Should you also be thinking about monitoring whether ongoing services are being provided to clients, as promised?

Similarly, does your remuneration structure encourage a treating customers fairly app-roach by having an appropriate balance between initial sales and servicing?

Other areas to consider inc-lude whether staff have been adequately trained, not just for using the platform but also for the new investments or services you may be offering? Also, are you managing conflicts of interest adequately? Conflicts can arise because the platforms cut administrative costs or aid recurring income (potentially increasing the value of the business), conflicts of interest are not just about specific links to, or shareholdings in, a platform. This is by no means an exhaustive list of the issues that need to be considered.

Our chief concern from the thematic review was that failures in systems and controls around platforms applied to all the firms we visited. Tellingly, it was systems and controls failures and training and competence arr-angements that were key factors in the Moneywise IFA fine.

Individual suitability
If you are using a platform or a number of platforms and also have a centralised approach to investment advice, then you must ensure that the advice you give is suitable for individual customers.

It is not right or acceptable for all clients to be shoehorned into pre-packaged investment solutions that are not in their best interests. We know that advisers pride themselves on providing personalised advice and this should not be lost by commoditising advice and creating a one-size-fits-all approach. Careful client segmentation can help improve how firms match services to customers but, even then, there are likely to be clients for whom this approach is not suitable and they should be treated accordingly. Indeed, there may be clients where a simple solution – such as a transactional sale – is in their best interests.

What are your next steps?
If you have not already done so, you should review the way you are providing services to clients, assess whether you have adequate systems and controls in place and that these have been updated appropriately if your business model has changed. There are a variety of resources in this area for both platform use and firms in transition to an RDR-style world more widely.

The FSA will continue to engage with the industry on a regular basis to help firms understand our requirements and expectations. In addition, there are useful materials on our website that firms may find helpful, such as a good and poor practice report and a small firms factsheet.

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