In the final run-up to the RDR, the almost endless supply of new FSA documents is hardly surprising. It appears increasingly obvious that the scale of the overall task of delivering the RDR is exacerbating their tendency to deliver regulations that are simply not joined up.
A few weeks ago in this column, I pointed out how the regulator’s lack of understanding of what can be achieved by using technology is undermining the market’s ability to deliver innovation.
The recent guidance consultation, Assessing suitability: replacement business and centralised investment propositions (GC12/6), presents a fresh set of challenges.
Although many elements of the document have been criticised, I found it easier to digest than many other recent FSA publications. The regu-lator has in this instance chosen to use its process of not just outlining its requirements but also giving examples of good and bad practice. I find this a valuable approach to putting requirements in context and think it is a shame the FSA does not use this method more often.
Although many people have accused the regulator of creating confusion with these latest requirements, by my reading, it is has clearly articulated a key set of steps that must be followed both in conducting replacement business and creating centralised investment propositions. Reading this particular document, I was struck by how relatively straightforward it would be to build software around the business replacement process to create a full business-switching audit procedure.
This should be seen as a major opportunity by advisers, life offices and platforms alike, indeed anyone who wants to provide low-cost financial products to consumers. In contrast, any organisation providing a poor level of service or expensive legacy products has much to fear from the regulator so clearly articulating its requirements.
The vast majority of the stated requirements in the two core areas covered by the document are in practice little more than common sense and steps which any firm seeking to genuinely protect their client’s interests would, I am sure, build into their processes. Firms making good use of technology across their businesses should find it relatively straightforward to comply with the majority of what is asked for. I can’t think of an individual piece of software that delivers all that is needed to conduct the end- to-end replacement business process, however, it must be a benefit that the regulator has clearly defined its expectations, including what both good and bad look like.
Used correctly with the right product or platform provider, the process as identified in GC12/6 could be seen as a template for advisers who want to diligently deliver a service that optimises the potential of their clients’ investments while at the same time ensuring they are entirely suitable. Such is the extent of the closed book life office estate that there really ought to be enough potential business for advisers to recycle to keep any adviser fully occupied for the next decade or so. In practice, what we are seeing here is the opportunity to give the consumer the benefit of an arbitrage by replacing old or expensive products with new low-cost ones delivered in line with customer objectives.
It is fair to recognise that within the document there are more than a few curve balls which will present challenges to various parts of the industry. For example, the obligation on advisers to consider the volume of trade likely within a fund shines a light on a dark corner of the fund management industry that has long been a mechanism for extracting undisclosed costs, I think this should have been exposed years ago and the fact that the regulator has now formally placed responsibility upon advisers to explore this issue will hopefully be the beginning of the end of this particularly opaque process.
The requirement that a discretionary manager has an obligation to ensure that any personal recommendation made by an adviser is suitable will, I imagine, create some major challenges for DFMs. Just as certain of the elements of the recent legacy commission rules appeared to put life offices in a preferential position over platforms, so it could be argued that this dual suitability is imposing an obligation on DFMs which neither life offices nor platforms has to comply with.
This does seem to suggest that the DFMs will need to carry out their own assessment of an adviser’s suitability recommendation, so it is easy to see how this could bring adviser business with DFMs rapidly grinding to a halt.
Equally, the responsibility to recognise and address conflicts of interests that arise from an organisation that is supplying a centralised investment proposition also having a compliance role within the business will, I am sure, cause some challenging discussions within networks and support businesses. This last point should not be impossible to resolve but it may require greater clarity and perhaps even some Chinese walls between different parts of organisations.
If the FSA were to set out with the objective of creating a framework to encourage advisers to seek out uncompetitive products and address situations where historic inconsistencies may lead to a lack of control over risk, they could have done far worse than come up with GC12/6. For some time, it has been clear to me that if the closed book life offices want to retain assets, there are several steps they need to take to demonstrate they really care about their customers. As few, if any, seem to be taking such action this regulatory guidance is both well timed and welcome.
It is easy to see how this paper could be turned into a huge new business-generation exercise and it represents a massive opportunity for industry software suppliers, product and platform providers to help advisers write replacement business in a fully compliant fashion.
Ian McKenna is director of the Finance & Technology Research Centre