CIP migration could be another RDR-linked banana skin for IFAs, warns FSA

The FSA’s latest Guidance consultation linked to Centralised Investment Propositions (CIP) and Replacement business broke earlier this month and is already attracting much comment in the ‘Twitterverse’ and in the financial trades.

It focuses on the advisory process around selection of discretionary investment management, portfolio advisory services and distributor-influenced funds by advisors for their customers. RDR has demanded IFAs review their ways of working. Many have fixed on new strategies in order to secure their futures in the commission-free Adviser Charging world which will be forced on them in just over seven months time.

Many IFAs understandably have arrived at the conclusion that they need to focus their energies on what they do best and outsource other activities to specialists so they can focus on offering high quality advice and service to their customers post RDR.

Many IFAs have taken the view that they need to outsource their customers’ investment management to experts if they have not done so previously. Many IFAs have selected discretionary investment managers and understandably are keen to move as many customers as possible into them; others are busily migrating customers into platforms and advising clients to move their assets into platform-based funds.

With all this migration activity ongoing the FSA is keen to ensure the principles of good advice and TCF are being observed in this process. They want to make sure IFAs are not fitting square pegs into round holes or ‘shoe horning’ them just to make sure the IFA is ready for RDR. In short, RDR Readiness should not be at the expense of the customer. They recommend several safeguards to avoid this.

Key tenets therefore are:

  • IFAs migrating customers to CIPs (and migrating business more generally) need to demonstrate the suitability of the replacement business to the customer
  • IFAs need to use robust processes and controls when recommending replacing existing business

Specific Disclosure requirements are as follows:

  • IFAs need to show old investment illustration alongside the new one. This is particularly important for showing the impact of charges but is also important to show likely performance differences
  • It is particularly important to show investment performance improvement expectations if this is the rationale for making the move to a new provider
  • IFAs are encouraged to use Reduction in Yield calculations for old versus new illustration so these can be properly compared
  • Proper Suitability Reports needs to be produced which are clearly tailored to specific client needs.
  • IFAs also need to show evidence of segmentation of client base so that one group might be offered a model portfolio service because they have more assets and investment experience whereas another is recommended to use lower cost managed funds for those with limited funds and needing a low cost option etc
  • IFAs must wherever possible avoid incurring unnecessary additional costs in the migration for the customer. This is the single largest reason for the FSA to rule the switches were ‘unsuitable advice’

Specific Management Information (MI) requirements:

  • IFAs must ensure you have a proper File Review process to ensure advisers are not moving customers without considering properly whether this is the right move for each customer
  • MI reporting linked to the File Reviews needs to be sophisticated to throw up alerts if it looks like unsuitable advice may have been given
  • MI needs to details volumes of CIP recommendations versus volumes of non-CIP recommendations to determine what the average is and alert managers where averages are being exceeded by specific advisers.
  • MI should provide analysis of file review process to flag up other anomalies. Some systems monitor income levels, product persistency and operate a traffic light system to trigger deeper investigation. All this is considered good practice. Wholesale migration of RI’s books of customers onto new discretionary fund managers is definitely not good without a strong system of checks and balances.

When selecting a third party CIP advisers are advised to consider the following:

  • Checking the Terms & Conditions of the CIP – are they too onerous
  • Checking the charges and ensure transparency
  • Considering reputation and financial standing
  • Considering the range of tax wrappers and
  • underlying asset classes you can invest in
  • Flexibility levels to move into new investments as customer demands change

IFAs that are in the midst of asset migration strategies but weighed down by regulatory requirements to segment, analyse and then communicate effectively and in a compliant way to all their clients; might want to consider having a conversation with Legacy Asset Systems at  

Dunstan Thomas is partnered with this organisation which is now working with the likes Openwork and many other advisory firms as well as major platform providers including Ascentric.

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