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FSA finds poor practice on central choice

The FSA says firms should not view centralised investment propositions as the automatic investment solution for all clients without assessing individual suitability.

The regulator’s guidance consultation on replacement business and CIPs, published last week, defines replacement business as switching a client out of an existing investment into a new solution.

Centralised investment propositions refer to standardised approaches to advice, including model portfolios, discretionary investment management and distributor influenced funds.

The regulator assessed 181 investment files from 17 firms as part of a thematic review into the use of CIPs. It found the quality of disclosure to be unacceptable in 108 cases and found the quality of advice to be unclear in 103 cases and unsuitable in 33 cases.

It says it saw examples of good practice, such as firms conducting detailed research on their clients’ needs before deciding whether to offer a CIP, but there were also examples of poor practice.

The FSA says: “Several firms operated a CIP as the automatic investment solution for all clients. In addition, the firms did not always identify when the CIP was not a suitable investment solution for a client. This resulted in advisers recommending the CIP to clients for whom it was not suitable.”

The regulator also found that some firms which had inherited CIP solutions through mergers and acquisitions failed to assess whether the CIP was suitable for the needs and objectives of their new, enlarged client banks.

Firms outsourcing discretionary management can either arrange for the client to have a direct contractual relationship with the discretionary fund manager or retain responsibility for the service while outsourcing the actual management. The FSA says in the latter case, firms still need to hold the relevant permissions for managing investments, even if they are not carrying out the management of the funds.

The FSA is also concerned about firms that are failing to justify additional charges when recommending clients switch out of existing investments.

It says it saw examples of firms recommending switches based on improved performance prospects but without providing any evidence to show that better performance was likely to be achieved.

The FSA says: “Our examples of good and poor practice are taken from our work on reviewing the suitability of CIP recommendations.
“However the examples are relevant to all replacement business recommendations. Continued failings in the suitability of such recommendations are not acceptable.”

Key issues firms should consider on centralised investment propositions

  • The needs and objectives of their target clients when designing or adopting a CIP
  • Whether the CIP is suitable for each client on an individual basis
  • Establishing a robust control system to mitigate risks which might arise from a CIP, including managing conflicts of interest

Key issues firms should consider on replacement business

  • Objective consideration of their clients’ needs and objectives
  • Collecting necessary information on their clients’ existing investments and the recommended new investments, such as product features, tax status, costs and the performance of the underlying investments
  • Implementing a robust risk-management system to mitigate the risk of unsuitable advice and poor client outcomes

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