Following concerns raised in its Retail Conduct Risk Outlook in 2011, the regulator said it conducted a thematic review of seventeen firms, looking specifically at centralised investment propositions (CIP) and replacement business practices.
In it, CIPs were classed as standardised approaches to providing investment advice, such as portfolio advice services where a portfolio of investments is designed to meet a target asset allocation ("model portfolios") and discretionary investment management, either in-house or outsourced, where the adviser has some say in the strategy adopted.
Of 181 investment files analysed, the City watchdog found the quality of advice unsuitable in 33 cases and unclear in 103. In 108 cases it found the quality of disclosure was unacceptable.
Main concerns
The FSA’s main concerns surrounding these investment solutions, which it says more firms are adopting ahead of RDR, are that:
- A customer is inappropriately ‘shoe-horned’ into a one size fits all solution that is not suitable for that customer.
- A customer’s existing investments are churned into a CIP without adequate consideration of whether the switch is suitable and in the customer’s best interest.
- A customer incurs increased, less transparent costs with few additional, actual benefits.
As such, its proposed guidance states that firms must assess each individual customer’s specific needs and objectives to see if the CIP is suitable for that customer.
"If it is unsuitable, the firm must recommend an alternative solution or make no recommendation," the regulator added.
Replacement business shortfalls
In terms of replacement business, the FSA said it identified a large number of firms failing to provide adequate justification to switch a client’s existing investments into a new solution.
It said this suggests a significant risk that investors are receiving unsuitable advice to switch when the may have been better off holding an existing investment.
The FSA’s guidance on replacement business practices, said:
- Firms should consider the issue of cost for all replacement business recommendations.
- Firms should justify why the new solution is likely to outperform the existing investment, where improved performance prospects are a reason for the switch.
- Firms must collect the necessary information on the customer’s existing investment and demonstrate why it no longer meets their needs and objectives.
Linda Woodall, head of investment intermediaries at the FSA, said: "The FSA continues to prioritise the quality of advice given to retail investors. We believe CIPs can offer benefits to both firms and their customers, but our thematic review indicates that they raise a number of specific risks to consumers. Our proposed guidance illustrates the steps firms should take to mitigate these risks and ensure they are providing suitable advice to their customers.
"We are also concerned that too many firms are not acting in the best interests of their customers, when recommending a switch to a new investment solution. Given we have made our concerns in this area very clear, it is unacceptable that firms are still not getting this right.
"Although firms are continuing to develop CIP offerings in advance of the RDR, there is no reason why they can’t change their replacement businesses practices immediately."
Do you think the FSA’s concerns regarding the use of DFMs and model portfolios are legitimate? Let us know below.