Webinar: Centralised Investment Propositions & Replacement Business

The webinar here looks at how suitability can be demonstrated, focusing on due diligence and adoption of CIPs, through to demonstrating suitability in individual cases.  Good and poor examples were discussed as were FCA expectations when reviewing client files.

(For reference, the finalised guidance on which this is based can be found here).

The FCA emphasised time and again that ‘suitability of advice needs to be demonstrated on an individual basis’.

Centralised Investment Propositions

The FCA recapped on their thematic reviews from 2012 and the key issues with CIPs. The three most common findings are still relevant today:

  • Shoe-horning – firms might recommend a ‘one size fits all’ solution which is not suitable for the individual needs and objectives of a client;
  • Churning – firms might advise 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 might result in higher (and potentially less transparent) charges than the client’s existing investments.

The FCA suggested these issues are considered when undertaking file checks.

To demonstrate suitability you need to start with:

  • Client segmentation;
  • Design criteria;
  • Reviewing the market;
  • Due diligence and selection (the FCA states ‘at least annually’);
  • Integration of CIP into existing business models e.g. for compliance staff when file checking.

The FCA gives some very good information regarding these 5 points and we suggest you watch carefully from around minute 18.

When advising on CIPs, firms need to consider the following:

  • Needs and objectives of clients; if objectives are missing, the file is automatically unclear;
  • Simple needs; does the client need the potential complexity of a CIP;
  • Segmenting clients to offer a range of solutions to meet the needs and objectives of different client segments;
  • Portfolios that align accurately with the risk descriptions and the risk profile of the client;
  • Particular investment circumstances;
  • Particular investment preferences;
  • Ensuring that advisers are competent and can identify when a CIP is not suitable;
  • Ensuring that there are sufficient controls in place to identify any conflicts of interest with the recommendation.

Replacement Business

Common findings:

  • Poor comparison against existing investments, particularly:
    • Objectives;
    • Charges;
    • Performance;
    • Tax;
    • Risk.
  • Poor challenge by compliance;
  • Lack of control – no sign off process;
  • Lack of pre-approval.

The FCA expects you to compare and contrast all of the considerations above even if only one area is the main driver.

When advising on replacement business, firms need to consider:

  • Up to date needs and objectives of clients; if objectives are missing, the file is automatically unclear;
  • The cost and expected charges of the new product compared to the existing one;
  • If performance is a driver, adequate records need to be kept to show why;
  • The clients tax position;
  • Term;
  • Particular investment circumstances;
  • Particular investment preferences;
  • Simple needs;
  • Ability to identify poor practice within the firm.

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

This simply reiterates information that has previously been issued and should not come as a surprise.

However, it is a very good webinar and a very useful source of information.

The section covering client segmentation, design criteria, reviewing the market, due diligence and integration (from approximately minute 18) is particularly useful and relevant.

Action Required By You

  • Please watch the seminar – it is very useful;
  • Ensure if using a CIP or conducting replacement business you have considered the points listed and can demonstrate individual suitability;
  • Build the above into client file checks;
  • Clients should discuss any issues directly with their nominated ATEB consultant;
  • Alternatively contact us here.
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About the Author

Steve is an ATEB Director and has a deep understanding of all matter regulatory, built up over his 30 years + in the industry. With a training background and a technical brain, he overseas numerous complex projects and client implementation work.

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