FSA toughens rules around centralised outsourcing tools – Financial Services Authority requires adviser firms to lay out costs and benefits to client in clear language – Firms looking to transfer a client’s investment into a centralised investment proposition must demonstrate not only why the new investment suits the client’s needs but also why it does so more effectively than the current investment.
According to new Financial Services Authority finalised guidance in Cips:• All firms providing investment advice should ensure they have robust processes and controls when recommending replacing an existing investment.
• The costs of the recommended investment solution must be in the client’s best interest and presented in a way likely to be understood by the client.
• Where a discretionary management service is being used to outsource investment decisions, adviser firms do not need to have in place three-way agreements between the DFM, the adviser and the client.• When an advisory firm appoints a discretionary manager and deals directly with them, the adviser becomes a client of the discretionary manager. The adviser firm’s clients must be told that a DFM service is being used to manage their investments and the implications of this.• When improved performance prospects are one of the primary reasons for the recommendation, the adviser must clearly demonstrate why the new investment is in the firm’s opinion likely to out-perform the existing investment.
• The recommendation must be suitable given both the tax implications and the client’s specific objectives.
• The firm must also assemble information about the client’s present investments and demonstrate why these no longer meet the client’s needs and objectives.
• In the interest of treating customers fairly and in light of this guidance, firms conducting replacement business should consider reviewing the replacement business sales process, checks and controls to reduce the risk of unsuitable recommendations, the quality of management information and the quality of challenge provided by the file review function.
• A firm either selling or intending to sell CIPs should consider the needs and objectives of its target clients when designing or adopting a CIP.
• Such a firm should ensure it is not “shoe-horning” clients into the CIP.
• Such a firm should establish a robust system to identify and mitigate risks which might arise from the specific characteristics of its CIP.
Go to original paper: http://www.fsa.gov.uk/static/pubs/guidance/fg12-16.pdf
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