A platform revolution

The FSA’s latest guidance consultation thematic review paper GC12/06 has been out for a few weeks now, and I do not think it is overstating the case to say it may cause a quiet revolution in the platforms space.

For the uninitiated, this 26-page bombshell covers two main areas, replacement business and centralised investment propositions. If that just looks like a collection of random words, what we are really talking about is product-platform switching and the use of model portfolio or discretionary investment services.

For such a short, and surprisingly well-written, paper there is a lot to go at. The FSA has a concern that clients are being ‘shoehorned’ into products, investments and structures without a proper suitability check. This is not helped by the fact that in 56 per cent of the cases it sampled, the record-keeping was so poor the regulator could not decipher whether the advice given was good or bad. As many as 60 per cent of cases did not include a proper disclosure of costs – hold that thought, we will revisit it in a moment – and 18 per cent of cases sampled were bad advice.

Apart from sloppy record-keeping – surely unforgivable in this day and age? – the key dynamic I pick up from this paper is the not-new requirement of a proper per client suitability check, irrespective of what you are recommending to your client. A switch from an old personal pension plan to a platform-based Sipp? A per client suitability check. Moving from a bag-of-bones investment strategy to a properly structured risk-adjusted model portfolio structure? A per client suitability check. And so on.

This is all good stuff. But much more fundamental is the issue of cost disclosure. In the paper the FSA has said it expects advisers to consider all the costs that may be relevant in the existing and new proposition for comparison purposes.

Straight from the horse’s mouth:

3.9 Where the advice is to switch or transfer an existing investment to a new investment, we expect to see firms conduct a cost comparison between the two solutions. Firms should consider all the costs associated with the existing investment and the recommended product or portfolio. For example, firms should consider the impact of any trading charges levied on the portfolio. Firms should also consider the impact of initial costs.

3.10 Where additional costs apply, firms must judge whether they are suitable in light of the needs and objectives of the client. Additional costs may be justifiable where they are associated with a specific benefit that is valued by the client. Firms should disclose any difference in the cost in a way that is fair, clear and not misleading.