The FSA published a guidance consultation on replacement business and CIPs last week. Replacement business is defined as switching a client out of an existing investment into a new one. CIPs refer to standardised approaches to advice, including model portfolios, discretionary investment management and distributor-influenced funds.
The regulator raised concerns that firms were transferring clients into CIPs without assessing individual suitability and that firms were swit ching clients out of existing investments without justifying additional costs.
Mike Deverell, investment manager at Equilibrium Asset Management, says: “Firms can use a centralised model but there needs to be some flexibility to tailor that service. A lot of the guidance is basic good practice but, to be fair to the FSA, the industry has been pretty bad at implementing basic good practice over the years.”
Andy Merricks, head of investments at Skerritt Consultants, says: “If a new investment is going to cost more there has to be clear benefits to the client. If those benefits are not made clear, you have to question why a client is being moved. Models are an efficient way of running money but you cannot use one model to fit everybody.” (article continues below)
Lee Robertson, chief executive of Investment Quorum, agrees it is questionable where clients are transferred out of suitable investments.
But he adds: “The FSA says it wants consistency of outcome. A CIP allows me that. One of the concerns that the FSA has highlighted about treating customers fairly is that different clients were getting different outcomes, because individual advisers from the same firm were doing different things. It is quite contradictory.”
Examples of good and poor practice from the FSA thematic review on CIPs and replacement business
One firm used feedback from its clients and identified it only required a simple, low-cost CIP. It used this feedback to design and implement a CIP that provided an ongoing review service at a cost that was lower than the market average.
Several firms carried out a review of their clients’ typical needs and formulated a list of key requirements before tendering for a third-party CIP provider.
One firm placed a limit on the additional cost of replacement business at 0.5 per cent per annum. Recommendations could only exceed this limit in exceptional circumstances after a discussion with, and approval by, the advice manager.
Several firms inherited CIP solutions following mergers or acquisitions and failed to undertake any assessment to establish whether the CIP was suitable for the needs and objectives of their new, bigger client bank.
One firm outsourced the management of its CIP to a discretionary fund manager. The advisory firm did not arrange for its clients to have a contractual relationship with the DFM and neither did it hold the permissions to manage client investments. By managing the assets within the CIP on a discretionary basis, the firm was operating outside its scope of permissions.
Several firms had not clearly defined what level of additional costs they considered acceptable for their clients. As a result, their file reviewers were not consistent on when recommendations that imposed additional costs were justified.
“Under 4.9 in the document it gives an example of a firm that has clients in model portfolios run by a DFM where there is no contract with the manager. The FSA is saying that if the IFA does not have discretionary permissions then this is outside the rules/scope of permissions. Aren’t a lot of IFAs operating exactly this model, often promoted to them by platforms and the discretionary running the portfolio? If it is wrong, who is taking the blame?”
“This is fundamental stuff. Any firm running DFM/model portfolios based purely on commerciality and profit is going to have problems like the ones highlighted. There is no problem with the principle of CIPs but they must be properly thought through and focused on what is important.”