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Fay Goddard: IFAs must take care when outsourcing

The atmosphere in London is one of mounting excitement as preparation for the London Games enters its final phase. Underground stations, maps and roads have signage everywhere directing people to the various venues in a delightful shocking pink. Why this colour was chosen beats me but then I’m no brand expert.

Of course there are those who are not looking forward to the anticipated travel disruption and thousands of people descending on an already crowded city but my view is, if you can’t beat them, join them. I am looking forward to seeing the ladies hockey semi-finals and spending a day at the Paralympics.

So back to business; what is the financial planning community grappling with at the moment?

I would expect that the FSA’s latest guidance on assessing suitability in respect of replacement business and centralised investment propositions (CIPs) to have caught the attention of compliance officers and departments.

The results of the FSA thematic review on the use of CIPs was disappointing with 103 cases out of the 181 cases assessed by the FSA as ‘unclear’ with regard to suitability, in addition to the 33 cases that were determined as unsuitable.

Whilst those assessed as unclear is not evidence of unsuitable advice being given, the usual problem of not having defined processes and an adequate audit trail of how the investment advice was arrived at appears to still be prevalent. As the use of CIPs continues to increase firms really need to get this right.

There are two other aspects regarding the use of CIPs that I would like to highlight. These were mentioned at a recent conference at which I spoke and were delivered by an FSA speaker. Judging by the audience’s reaction, the comments came as a surprise to a good number.

First, a firm cannot outsource a regulated activity for which it doesn’t have FSA permission. So if a firm is offering a discretionary investment service to its clients, it needs to be absolutely clear about who is responsible for the investment advice, check that the agreements in place (both with the client and the outsourcing firm) state clearly who does what and be sure that the correct permissions are held.

The second point made was that where a firm uses a third party service, such as discretionary investment, it should still be sufficiently competent in the service being provided to its clients in order to be able to challenge and recognise unsuitable outcomes.

The FSA guidance includes examples of good practice, which is welcome and I would urge all firms that use CIPs to read the paper carefully and if necessary review internal processes to make sure you are meeting the standards expected by the FSA.

Finally, for those to whom it may be relevant, do take a look at the PFS’s updated Professional Direction paper on independent and restricted advice which now includes examples of how the use of CIPs may, or may not, impact on a firm’s status.

Fay Goddard is chief executive of the Personal Finance Society


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Well thanks for tha really inciteful pronouncement.
    I can hear eggs being sucked all over the IFA community.

    PS, are we really interested about Mz G’s excitement at going to events at the olympics?….err probably not.

    Are you readers interested in my excitement at finally being able to mow my lawn after the wet weather? …….err thought not.

  2. And the point of this article is?

  3. man on the moon 20th July 2012 at 10:22 am

    Fay, I feel sorry for the Londoners who will not benefit from the Olympic show and all of us who have to pay for Londons show.

    I would much prefer Fay to address with the PFS/CII Marketing Manager how they are going to improve the Brand Awareness of Chartered Financial Planners.

    This is a key issue for those of us pay extra fees and have sat all those lovely and expensive exams over the years.

  4. @Old Dog – Never mind, you’ve had a hard week. Cheer up, it’s Friday you’ll feel better later!

  5. Unfortunately Fay has fallen into the same trap as the regulator. (But whenever have they been clear and transparent?) I was at that same conference and what was not explained was that there is a significant difference in the terminology.

    Outsourcing – for a consideration and exactly as Fay has described.

    Referral – Passing the client on to (say) a DFM for no consideration and having no further input. Then those restrictions just do not apply, provided this is made clear to the customer.

    A vital distinction.

    However what I just cannot comprehend is how a client would stand still for ‘outsourcing’

    ‘Ah Mr Client, we won’t handle your £250k investment – we are going to outsource it to Bloggins Stockbrokers and they will charge you for the advice and the portfolio management. We will also charge you, because we hold your hand and give you cups of tea’

    ‘Hold on a mo – you’ll be doing nowt, but will still charge us and Bloggins will do the work?’

    ‘Er – that’s right’

    ‘Bugger off’.

  6. Richard Whitaker 20th July 2012 at 10:47 am

    Well said old dog my first reaction was DuuuuuuH!

  7. …..”where a firm uses a third party service, such as discretionary investment, it should still be sufficiently competent in the service being provided to its clients in order to be able to challenge and recognise unsuitable outcomes”. Would love to know what constitutes an unsuitable outcome? Drop in overall fund value? not as high a gain in one fund over another that the DFM has used? Give me a break. The regulation is strangling the entire industry by salami tactics (one thin slice at a time) and those who are losing and will continue to lose are end users. The very people we have been advising for years.

  8. Well Henry the fund management is an important but not the only part for financial planners giving holistic advice!

  9. Dear Ford Prefect (why so unambitious – What about Ferrari GTO?)
    Of course charging for holistic advice is fine. I am referring to the practice of charging for funds under influence or whatever it’s called while doing nothing for it – or even getting kickbacks from the DFMs. As long as there is no charge levied on that part which is outsourced (or referred) I see no problem.

    Overseeing an outsourced investment and charging for that is just a cheek from both parties. The DFM ought to provide a decent service in the first place, without the need for more fingers in the pie.

    Oh and BTW – it’s Harry not Henry

  10. Must be a tough job running the PFS with our money when you main concern in life presently revolves around the Olympics
    Don`t worry your sweet little head about your 900 members who are now shafted and in limbo due to a network failure
    Perhaps you may run into some of them working for G4S to make ends meet while you are on your way with your Corporate mates from the banks and the FSA

  11. Usual load of rubbish that tends to come from this woman.

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