There are certain issues in financial services that become the hot topic for a while before falling off the radar, only to rise up again when the original matter was not clarified as clearly as first thought.
Outsourcing is a case in point, particularly in terms of suitability and discretionary management.
It is an issue very much on advisers’ agendas for a variety of reasons. And we know it is also on the regulator’s agenda as a result of Mifid II and the Senior Managers and Certification Regime.
The benefits of outsourcing are clear, with enhancements to services provided by better technology, investment know how, governance and economies of scale, all of which can also reduce costs.
But vitally important at the start of relationships with third parties is clarity around roles and responsibilities, and who is doing what for the end client.
We are seeing advice firms relying more and more on discretionary fund managers and platforms for elements of their business models and services to clients. Whether it be lead generation, asset management, back office administration or compliance, to name a few, the challenge as to who is responsible for ultimate suitability becomes more complex.
Some firms run a dual suitability process where both the adviser and DFM are responsible. That is fine as long as all parties are in agreement and, most importantly, the client knows exactly what each party does.
Passing the buck
Let’s look at a DFM contracting with an adviser to provide management of a model portfolio on a platform for a client.
What are the respective responsibilities?
It is possible the DFM’s relationship is mainly with the adviser and assuming it is suitably authorised and providing a compliant service to the advice firm then, under COBS, this curtails its responsibility at the adviser level (in the absence of further agreements to the contrary).
However, that then leaves the adviser with a potential problem. If they are instrumental in delivering a service whereby discretionary management takes place for the client, who is the provider? Indeed, the platform could also be argued to be providing the service.
Ultimately, the position will depend on the documentation between the parties involved. That paperwork should clarify responsibilities.
Mifid II has raised the bar on suitability and resulted in a number of questions being asked, particularly in relation to client ownership in this instance.
There are also increasing issues when advisers come to retire or exit a business as to where responsibility lies and how clear the evidence and business rationale is to support that.
What is more, some of our due diligence work around merger and acquisition activity has uncovered confusion in terms of what the seller is actually providing as a service, what fees are being charged and whether there is evidence of cross subsidies.
Simon Collins is managing director, compliance consulting at Eversheds Sutherland