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FSA lays bare platform failings - what you need to know to pass muster.
Brickbats, compliments and a fine
The FSA have recently fined the advisory firm Money Wise IFA Ltd just under £20,000 for failings linked to FSA principles 3 and 7 - management controls and communicating with clients respectively. This action resulted from the wider review of investment advice and platforms conducted earlier in 2010. This regulatory update looks at some of the issues identified in the FSA's good and poor practice report following their review of advice and platforms plus we look at some of the generic lessons that can be learned from the Money Wise Final Notice.
Whilst we refer to the Money Wise Final Notice we are not commenting on their situation specifically, rather using the issues identified by the FSA as the basis of items.
No doubt many will have their views on this particular enforcement action - we have
endeavoured to examine this on a purely objective basis. What is worth noting though is that within the Final Notice the FSA acknowledge that there has been no customer detriment and indeed concede actions were often taken in the best interests of clients!
We will firstly remind ourselves of the good and poor practices identified by the FSA following their review of investment advice and platforms.
Investment advice and platforms
Good/poor practice
Earlier this year the FSA published a report detailing observations of good and poor practices linked to investment advice and platforms. This identified shortcomings in three main areas:
- quality of advice;
- systems and controls; and
- disclosure.
Dealing firstly with the quality of advice, the FSA are particularly concerned with the costs incurred when placing business on a platform when compared with potentially lower cost options. This is especially so where a portfolio review service cost is incorporated with product, platform and adviser costs. Not surprisingly the FSA liked it where costs are clearly identified and preferential terms applied, ideally to reduce overall costs whilst enhancing the overall client proposition. This also links to migrating assets onto a platform - the costs of switching were not always fully explained nor were existing options, benefits or guarantees considered. The FSA were also concerned about the assessment of client attitude to risk - their concerns were that ATR was not always sufficiently reflective of the client's situation e.g. term of investment, or a model portfolio was not tailored to meet a client's specific requirements.
Turning next to systems and controls, the FSA were concerned insufficient attention was given to aligning the platform options available, the type of client the firm advises and the services to be provided. Nor was there sufficient monitoring and review by firms of the services provided by platform providers.
Conflicts of interest were not always adequately managed or considered; nor were the training and competence arrangements sufficient in that firms failed to train advisers sufficiently on platform related issues or monitor their competence. The provision of advice was considered a risk; often the FSA considered clients were 'shoe-horned' into a platform based solution. The FSA observed that in some cases the platform limited the 'whole of market' approach, especially where the range of products within the platform is limited. The FSA commented there was a lack of oversight, risk assessment/management and monitoring of business associated with platforms.
The key risks linked to disclosure were failing to explain to clients a number of issues including:
- the services being provided - for example the terms of business contradicting the suitability report regarding whether an ongoing service is provided;
- the overall costs involved;
- any disadvantages of using a platform i.e. the inability to re-register assets away from the platform; and
- the requirement and importance of reviews and re-balancing portfolios.
The above is a précis of the FSA report, which is worth reading in full - available in the Library: March 2010. Not surprisingly there is a symmetry between the above and the issues identified in the Money Wise Final notice covered in the next section.
ITEMS FOR REVIEW BASED ON THE MONEY WISE FINAL NOTICE
Know your Principles! Unlike many enforcement actions which detail rule breaches of specific FSA rules, in this case it was a breach Principles Three (management controls) and Seven (communication with clients).
Firms may or may not be able to recite the eleven principles off by heart however they should not be overlooked as to a large extent the FSA rules are predicated on meeting these principles. At a high level, look at each of the Principles and consider how each is met within your firm. These overarching principles may well be used more in future enforcement actions so this is good starting point when assessing the systems and controls in your firm. Record the results of your assessment - this forms the start of a regulatory business plan!
Management control - know your products, particularly unregulated collective investment schemes (UCIS).
One of the issues was that the underlying discretionary managed portfolio contained UCISs. As we know, this is a hot topic, with the FSA recently publishing their findings following a review of the promotion of UCISs. This was covered in more depth in our previous regulatory update. Interestingly the FSA concede it is a grey area as to the extent financial promotion rules impact on UCIS held indirectly within a discretionary managed portfolio, however notwithstanding this, it is important that both advisers and clients know the components of a financial product. It is vitally important to always look through the headlines or product wrapper to understand the components of a product or portfolio and communicate this with clients, together with any particular risks associated with specific components i.e. UCISs not covered by FOS or FSCS. Do any of the products you recommend have UCIS components - do your advisers know this, do your clients know this and where applicable, have the UCIS requirements been met?
Management control - know your risks and monitor accordingly.
In any situation it is better the firm identifies any risks within the firm and identifies any deficiencies rather than the FSA. The firm's compliance monitoring should be sufficiently robust and constructively challenging relevant to the firm's activities and advice provided i.e. investments placed on platforms. The monitoring plan, including file checking, should be regularly reviewed to ensure it not only reflects the firm's current activities but also reflects any changes to strategy. Linked to the top item of this table, when was the last time your compliance procedures and monitoring plan was reviewed and is it sufficiently in depth to reflect the business your firm does/is intending to do?
Management control - how is competence maintained and assessed?
In this case the FSA criticized the firms T&C regime in that there was no meaningful follow-up to poor file reviews and generally the FSA have commented on poor T&C regimes. Given the complexity of underlying products this is a vital aspect of the firm's systems and controls. How robust is your T&C scheme and if asked, how would you prove competence has been attained, maintained and monitored? (Note - Panacea IFA have some exciting developments to announce shortly on T&C support).
Management control - consider any conflicts of interest
In this case there was a common directorship between Money Wise and the platform provider used - whilst this was disclosed to clients, the FSA felt the potential conflict was not sufficiently managed. Consider whether any there are any situations in your firm that potentially conflict with your clients' best interests.
Management control - do you have management information (MI) that supports all the above?
One of the common issues is that when asked by the FSA to produce evidence to demonstrate Principle Three, firms struggle to come up with meaningful MI. To what extent could your firm evidence adherence to Principle Three if asked?
Communication with clients - explaining the rationale for platform based investment or switches to a platform.
Time and time again we seem to see in FSA reviews the comment that advice is inadequately documented and so it was in this case and the wider review of investment advice and platforms. The FSA is always keen to see where an existing investment or product is changed, whether moving pension funds/providers or investments being migrated to a platform, that not only the rationale is considered for the recommendation, but all costs associated with the switch and advantages/disadvantages. Remember, this is the document that records the action taken and will be the primary reference source in the event of the advice later being challenged. How confident are you that your current suitability reports are sufficiently clear and detailed to stand up to future scrutiny?
Communication with clients - are all the risks fully documented and clear, fair and not misleading?
Based on the management controls mentioned previously, do your client communications make clear all risks/conflicts of interest? If you wrote them, get someone else to review them.
Communication with clients - where report templates are used, are they always sufficiently client specific and only contain relevant text? (1)
We all use templates for the right reasons of efficiency and avoiding re-inventing the wheel. Of course the downside is that an erroneous piece of information can be left in by mistake - reference to Mr Smith when in fact the report is for Mrs Jones.
What process is in place to mitigate this happening?
Communication with clients - where report templates are used, are they always sufficiently client specific and only contain relevant text? (2)
In the Money Wise Final Notice, the FSA had concerns that the template report did not contain sufficient client specific text, whether this was around the client's specific attitude to risk or the specific advice provided - instead template text was used. Thinking of your suitability reports, how client specific are they and how easy is it to tailor to client requirements?
Communication with clients - how clearly are costs explained?
Again in this case the FSA commented that the costs of investing on the platform could have been clearer in that the FSA would have preferred to have seen them consolidated in one place with a clear breakdown of the costs of the various components. How clearly are costs disclosed in your suitability reports and do they include all components to provide a fair comparison?
Communication with clients - are suitability reports sufficiently detailed and reflective of the advice model used by your firm?
In Money Wise's case, their suitability report did not include content referring to UCISs in the underlying portfolio, particularly the risks associated with the specific asset backed UCIS investment nor the fact this investment was not covered by the FSCS. How often is the content of your suitability reports updated and are you satisfied it goes into sufficient detail about the underlying product, portfolio or investment platform?
For more information, contact Kevin Jack at Enhance Solutions kevin.jack@enhancesolutions.co.uk or http://www.enhancesolutions.co.uk/
Article last updated: Sep 7, 2010
Derek Bradley, CEO
Sarah Paul, Marketing Director
James Bradley, Head of e-Relationships
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