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Adviser toolkit: Back to the beginning

In last month’s considerations for delivering independent advice, we explored the regulatory guidance that ‘it may be possible for a firm to conclude for many clients, early on in the advice process, that certain product types are not going to be suitable, and therefore not consider these product types further for those clients.’

If we think through the typical first page of the fact find (or the first screen if you are modern enough) we ask name and address, date of birth, health, partner or spouse, dependents etc. My own fact find then moved on to occupation, employment status, income and expenditure.

We haven’t asked about assets and liabilities, savings, pensions, insurances, attitude to risk, amounts available for investing or personal and financial goals yet, but we can already rule in (and out) certain products.

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A client may be too young to consider retirement options, or too old to add funds to their pensions. A married client with children can be considering saving and investing options for themselves and their children, while a single retired client with no dependents could be considering tax-efficient estate planning options. A Sipp may not be suitable for a civil servant, but could be an ideal solution for a partner in a veterinary practice.

Many advisers said that, following RDR implementation, they would have to be restricted because they did not advise on Unregulated Collective Investment Schemes (Ucis), a term now broadened to Non-Mainstream Pooled Investments (NMPI). For many companies this conclusion was incorrect.

Step back

If we start from the very general guidance on advice and suitability, it is undoubtedly the case that an adviser will (early in the advice process) be able to determine that Ucis are not a suitable solution for their client.

Let’s step back for a minute and consider a few reasons why the regulator had concerns about Ucis:

• They are described as unregulated because they are not subject to the same restrictions as Collective Investment Schemes (CIS).

• They can invest in assets that would in many cases not qualify for investment within a regulated fund (eg, because they are more risky or less liquid).

• They may not be subject to investment and borrowing restrictions aimed at ensuring a prudent spread of risk which apply to a regulated CISs.

• The risks are not always easy to understand.

• The governance arrangements and financial structure of the schemes may be risky for investors.

• Customers may not be covered by the Financial Ombudsman Service (Fos) or the Financial Services Compensation Scheme (FSCS) if there are problems.

These characteristics would make the professional adviser think carefully about the suitability of the investments for their client, even without detailed rules regarding restrictions on the distribution of such investments.

The rules which came into force on 1 January 2014 set out some changes which, in my view, make it clearer how and why, early in the advice process, you would exclude such investments from consideration.

The FCA now distinguishes between three types of retail customer:

(i) Sophisticated investors are described as retail clients with extensive knowledge of complex instruments who are able to understand and evaluate the risks and potential rewards of complex investments.