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Woodall spells out risks of ‘shoehorning’ clients into one-size-fits-all portfolios

Companies must act now to mitigate the risks posed by a surge in the use of centralised investment propositions ahead of the retail distribution review, says the regulator.

The FSA’s guidance consultation defines replacement business as switching a client out of an existing investment into a new solution.

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

Following a thematic review into the use of CIPs, the FSA found firms were failing to consider suitability and costs when switching clients out of an existing investment. It also said firms should ensure they are not “shoehorning” clients into a centralised investment proposition.

Speaking to Money Marketing, FSA head of savings and investments Linda Woodall says: “We are not saying that CIPs are inherently bad. We are trying to highlight to firms where risks might arise and to get them to think about mitigating those risks now.

“We are increasingly seeing CIPs being designed and used in the run-up to the RDR. We have seen some examples of firms which have set up CIPs well and instances where the practice is not so good.”

The consultation gives examples of good and poor practice on areas such as cost considerations, performance and collecting client information that firms should consider when assessing whether to switch a client out of an existing investment.

It also includes good and poor practice examples for firms designing or introducing a CIP, assessing individual suitability and managing conflicts of interest where a firm gains financially by recommending a CIP.

Woodall says: “The good examples are where firms put their clients first. They properly segment their client base and really understand it and design their CIPs to meet the differing needs of those clients. Good firms train their advisers in the appropriate application of a CIP, and, more important, when it is not suitable. Good firms also avoid conflicts of interest.”

Woodall expresses frustration that, despite the regulator’s previous work on assessing suitability and attempts to highlight failings in previous reviews on pension switching and platforms, firms are still failing to justify switching existing investments.

She said: “In terms of replacement business, we have obviously gone into the marketplace before and it is disappointing that we continue to find failings that we hoped would have been dealt with by now.

“The key thing from our point of view when it comes to replacement business is that the standards we have set out already should be being followed by now and certainly should be followed in future.”

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