The FSA is monitoring the distributor influenced funds market and says it will intervene if standards do not improve.
The regulator estimates that there are at least 40 firms offering DIFs to their customers, with around £2bn of assets under management in DIFs in the UK, involving the assets of over 10,000 investors.
In its Retail Conduct Risk Outlook published today, the FSA says it has concerns over whether DIFs are more beneficial to adviser firms than clients, as DIFs generally carry higher charges.
The regulator is also worried about how firms manage the conflict of interest of being incentivised to recommend DIFs and the obligation to ensure advice is in the client’s best interest.
It says another key risk of DIFs is the complexity of charges, as customers cannot clearly gauge what service they are being charged for and whether the fund offers value for money.
The FSA says: “In our ongoing supervision of firms, we have looked at files where DIFs have been recommended. Results have been mixed, with too much advice showing signs of unsuitability or a lack of key information on which to form a final assessment about the suitability of advice.
“Firms with DIFs should understand that we have concerns over this market and we would expect them to pay particularly close attention to sales processes here and the quality of their advice, including their obligations under the client’s best interests rule. We continue to monitor this market and expect standards to improve. If not, we may need to intervene to ensure customers receive the right outcomes.”