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Four issues facing advisers after FCA’s asset management study

Following a scathing FCA report on the asset management industry, Mike Barrett, consulting director at the lang cat, explains how advisers can incorporate the regulator’s latest advice into their work, while preparing for future rule changes.

The recent FCA Asset Management Market Study Interim Report sent shockwaves around the industry. Hardly anyone escaped without criticism, with some of the harshest words reserved for active fund groups, ratings agencies and investment consultants.

While not directly in the line of fire, financial advisers still have much to ponder. There is the hint of further regulatory work to come, aimed at how advisers use platforms and select investment solutions but, in the meantime, while the FCA is clearly taking a very close look at the asset management sector, nothing has actually changed regarding a financial advisers’ responsibilities for suitability.

So, what are the existing requirements, and how can advisers carry on meeting these requirements whilst also considering the contents of the Asset Management Study?

The recent FCA Asset Management Market Study Interim Report sent shockwaves around the industry. Hardly anyone escaped without criticism, with some of the harshest words reserved for active fund groups, ratings agencies and investment consultants.

While not directly in the line of fire, financial advisers still have much to ponder. There is the hint of further regulatory work to come, aimed at how advisers use platforms and select investment solutions but, in the meantime, while the FCA is clearly taking a very close look at the asset management sector, nothing has actually changed regarding a financial advisers’ responsibilities for suitability.

So, what are the existing requirements, and how can advisers carry on meeting these requirements whilst also considering the contents of the Asset Management Study?

Calculation of the cost to a client

The central theme of the study was the costs paid by investors, and whether these were of value. Advisers are already required to assess this whenever making a personal recommendation. COBS 6.1A.16g states that, ‘In order to meet its responsibilities under the client’s best interests rule…a firm should consider whether the personal recommendation is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account’.

Exactly what level of costs are reasonable, and ‘of value’ is not specified, so it is up to the adviser to decide. A good practice could be to file check anything above, say, 200bps, and reject anything above 250bps. Whatever figures you use, it is important to focus on the total cost of ownership, factoring in all charges incurred, so you ensure the transaction does not become self-defeating.

Selection and due diligence

Of course, suitability isn't just about costs. Something that is unsuitable but cheap is still unsuitable so, when making a personal recommendation, advisers need to look beyond costs and assess the features and benefits of the product in question.

Earlier in 2016, the FCA published its latest thematic review on this subject, looking at how advisers should conduct research and due diligence on products and services. Key requirements here are to avoid status quo bias, and to ensure the firm has a ‘culture of challenge’, enabling them to review and challenge decisions made regarding platform selection.

Suitability and use of tools

If advisers are using a risk profiling tool then they also need to take steps to ensure they understand the scope and limitations of the tools being used, and mitigate against any limitations in the wider advice process. For example, if your risk profiling tool is designed to assess risk tolerance, then you also need to be looking at risk capacity, risk required and so on, as part of the wider factfind.

The FCA guidance on this subject has been in place since 2011, and is clear. Tools support advice, they do not replace it, and advisers are still responsible for the recommendations made.

Replacement business

Finally, with the new focus on costs and how investment propositions are constructed, it is worth referring back to the current guidance on this topic. The guidance on replacement business and centralised investment propositions is arguably the most important paper for advisers to re-read in light of the recent asset management study.

All the current rules regarding cost comparisons, constructing and selecting investment solutions, and ensuring these solutions meet the needs and objectives of clients, are contained within this document.

Conclusions

The recent Asset Management Market Study Interim report is a hugely important paper for the industry generally, and we would urge advisers to read and consider the points raised.

As it stands, there has been no change to existing regulation but, with the direction of travel becoming ever clearer, it gives advisers the framework to continue to make suitable recommendations today, while future proofing their advice proposition against any new regulations that might emerge.

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