Many firms are now operating their own preferred investment solution – a Centralised Investment Proposition (CIP) – which they seemingly recommend to most, if not all, of their clients.

Firms regularly raise questions with ATEB around the use of a CIP. What firms are usually concerned about is whether this impinges upon their ability to hold themselves out as being independent.

It’s not easy to answer this definitively, not least because of the variations in the investment solutions out there.

As firms increasingly adopt CIPs, we see some refer everything to a DFM or use DFM model portfolios, while others have created their own models which are overseen by their Investment Committee. Some may prefer actively managed portfolios whereas others have gone down the passive route or use a blend of active and passive. There are also firms that have aligned their advice towards specific niche solutions offered by a small number of large providers (you’ll get the drift here). This isn’t an exhaustive list but what’s being offered may not necessarily be representative of a comprehensive review of the market.

We looked in some detail at the definition of ‘independent’ in a recent article. You can read that piece here, but the essence is that, for firms/advisers to be independent in the broadest sense under MiFID II, their assessment of suitability must include a sufficient range of financial instruments, structured deposits and other retail investment products. The products must be sufficiently diverse in terms of type and provider to ensure that the client’s investment objectives can be suitably met. Some firms might struggle to show that their research and PROD processes support the firm’s CIP meeting the aforementioned list of requirements. And, if we consider the requirement to ‘ensure the client’s investment objectives can be met’ it is not obvious how the most usual practice of selecting a portfolio because it matches some assessed risk score necessarily relates to the client’s objectives.

To be independent, firms don’t need to recommend a range of investment solutions, but they cannot default to their chosen solution without a full audit trail. If a firm has a homogenous client base (unusual) then clients may well end up in a similar/same solution, or a particular type of client may be targeted. Ultimately the firm decides who it chooses as a client and a filtering process may be used for this. More often than not we see a minimum level of investable assets as the driver here rather than a more comprehensive set of client attributes as indicated in the PROD process.

To quote the regulator for a moment, COBS 6.2B.15 states:

An investment firm that provides investment advice on an independent basis and that focuses on certain categories or a specified range of financial instruments shall comply with the following requirements:

(a) the firm shall market itself in a way that is intended only to attract clients with a preference for those categories or range of financial instruments;

(b) the firm shall require clients to indicate that they are only interested in investing in the specified category or range of financial instruments; and

(c) prior to the provision of the service, the firm shall ensure that its service is appropriate for each new client on the basis that its business model matches the client’s needs and objectives, and the range of financial instruments that are suitable for the client. Where this is not the case the firm shall not provide such a service to the client.

The firm must also be able to fully justify every recommendation and support this with evidence that appropriate research and due diligence has been undertaken, but what we often see is that the firm has a preferred platform provider (many CIPs are only available via a platform) and that remarkably, the annual due diligence exercise results in the same platform being used year after year. Or if a decision is made to switch platform every client is moved over at the next review with inadequate consideration of individual client suitability.  We also see a high proportion of clients being recommended the same investment solutions.

Self-fulfilling suitability

What this appears to boils down to a lot of the time is switching a client’s pension/ISA/GIA to the firm’s CIP on the self-fulfilling, circular justification that what is wrong with the client’s existing plan is that it is not in the firm’s CIP!

There’s often some generic commentary in the suitability report about active/passive/risk targeted or whatever. There may be a comparison of costs as is required, although many firms continue to exclude advice costs – so making the comparison non-compliant. Job done, the client’s investments are switched! Most new business is replacement business these days, it seems.

Sometimes the new solution is cheaper than the existing arrangement, so that’s a green light to go (it shouldn’t be automatically so, unless cost saving is a client objective), but with actively managed propositions, and including adviser charges as is required, the costs are often higher in the proposed arrangement. This is where we often see lots of text extolling the virtues of active management, investment committees, regular rebalancing and so on but, often, little in the way of demonstrable tangible benefit to the client. It is important to remember that COBS suitability rules have much to say in this regard, including:

“When providing advice that involves switching between underlying investment assets, insurance intermediaries and insurance undertakings shall also collect the necessary information on the customer’s existing underlying investment assets and the recommended new investment assets and shall undertake an analysis of the expected costs and benefits of the switch, such that they are reasonably able to demonstrate that the benefits of switching are expected to be greater than the costs.”

AND

“Investment firms shall have, and be able to demonstrate, adequate policies and procedures in place to ensure that they understand the nature, features, including costs and risks of investment services and financial instruments selected for their clients and that they assess, while taking into account cost and complexity, whether equivalent investment services or financial instruments can meet their client’s profile.”

In plain English, these rules mean that, whatever an investment solution costs, there should be a benefit to the client that is demonstrably greater than the cost. In addition, there should always be consideration of using simpler and/or less expensive solutions that meet the client’s objectives. That includes not defaulting all clients into taking ongoing service when that is not necessary.

Referring to the FCA’s 2020 review of RDR, which found that firms place 90% of new clients into ongoing advice, FCA director of consumer investments Therese Chambers asked her audience of advisers, “Do 90% of all customers actually need a financial MOT every 12 months?” Further, the review also found that more expensive advice services did not have noticeably different features to cheaper services.

From 2012 to Consumer Duty 2023

In the FCA’s recent Dear CEO/Director letters (if you haven’t read it, we strongly recommend that you do so) and in commentary in a recent speech, the regulator has pretty unambiguously stated that firms with a one-size fits all charging model need to carefully consider their charges, but this is nothing new.

In 2012, the FSA issued FG12/16, its final guidance on Assessing Suitability – Replacement Business and Centralised Investment Propositions. This was an important document in our view and one of such prominence that the FCA has not deemed it necessary to issue an update. At a seminar delivered by the FCA late last year and attended by ATEB, the FCA pointedly referred to this document three times, so they clearly still view it as being valid.

FG12/16 highlighted that the regulator could see tangible client benefits in some CIPs, noting that: 2Clients can benefit from more structured and better researched investments and firms can benefit from efficiencies in the management of risks associated with investment selection.”, but at the same time voiced concerns about:

• ‘Shoe-horning’ – firms recommending a ‘one size fits all’ solution which is not suitable for the individual needs and objectives of a particular client;
• Churning – firms advising clients to switch their existing investments into a CIP without adequate consideration of whether the switch is both suitable and in the client’s best interest; and
• Additional costs – the use of a CIP resulting in higher (and potentially less transparent) charges than the client’s existing investments and with few additional, actual benefits.

Those who either haven’t read the Final Guidance and haven’t read it recently we strongly recommend that you do. Not only is it useful CPD material, but it prominently outlines the issues that the regulator identified over ten years ago, but that are seemingly still prevalent now – we still see this issues regularly within audits and file reviews.