Do you need discretionary permissions?

We have written previously about the issues that can arise when firms use Discretionary Investment Manager (DIM) solutions for clients, in particular, the hidden dangers of operating on an agent as client (AAC) model. You can read the article here.

In our previous articles, we referred to the comprehensive guidance published by the PFS in relation to AAC. 

Careful readers of the PFS guidance will notice an almost throwaway line that could raise some eyebrows. The throwaway line is:

“… in the FCA rule book only Advisers who have discretionary permissions can truly outsource to a DIM …”

We know that many firms use DIM solutions but do not have discretionary permissions, so it is of interest to unpack this statement a bit so as to fully understand what it means for firms.

The operative word in the statement above is ‘outsource’. 

The FCA defines outsourcing as:

“an arrangement of any form between a firm and a service provider by which that service provider performs a process, a service or an activity which would otherwise be undertaken by the firm itself.”

Firms will engage with a DIM in one of three ways. 

  • Complete referral
    The adviser firm, having no discretionary permissions, arranges for the DIM to have a direct relationship with the investor (or such relationship is based on the ‘reliance on others’ framework). This is NOT outsourcing as it is not something that the firm itself could offer.
  • Agent as client
    The adviser firm, having no discretionary permissions, arranges for the client’s funds to be invested in a DIM solution where the DIM has no direct relationship with the end investor but treats the adviser as the client. This is the AAC operating model and is typified by the DIM managed portfolio on platform scenario used by many firms. While the AAC basis carries a number of risks for clients and firms, this is NOT outsourcing as it is not something that the firm itself could offer.
  • External DIM used
    The firm, which DOES have discretionary permissions, chooses to use an external manager to provide the portfolio management service. This IS outsourcing as it is something that the firm itself could offer and therefore meets the definition of outsourcing.

    The implication of this situation is that it can ONLY be implemented by a firm holding the relevant discretionary permissions.

 

Outsourcing rules
This arises directly out of the outsourcing rules. Specifically, SYSC 8, which states that a firm outsourcing remains responsible for that which is outsourced and that responsibility can only be discharged if the firm has the competence and permissions to carry that responsibility or to provide that service itself.
 

SYSC 8.1.6 R 03/01/2018 RP

If a firm (other than a common platform firm) outsources critical or important operational functions or any relevant services and activities, it remains fully responsible for discharging all of its obligations under the regulatory system and must comply, in particular, with the following conditions: 

(1) the outsourcing must not result in the delegation by senior personnel of their responsibility;

(2) the relationship and obligations of the firm towards its clients under the regulatory system must not be altered;

(3) the conditions with which the firm must comply in order to be authorised, and to remain so, must not be undermined;

(4) none of the other conditions subject to which the firm’s authorisation was granted must be removed or modified.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

Firms need to ensure that they understand the nature of any relationships with third parties, including platforms and DIMs. There could be regulatory risks and issues that need to be addressed.

In particular, if using a DIM portfolio, firms must identify the applicable operating model. Many DIMs still work on the AAC basis, which comes with a number of issues that we have covered in detail before, and which need to be addressed.

Action Required By You

  • Identify the nature of any third party relationships;
  • Review and address any issues arising;
  • Contact your usual ATEB Consultant for further information or contact ATEB.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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