FCA clears the air around good practices for CIPs despite original concerns

An FCA Positive Compliance Workshop considered the use of CIPs. A CIP is defined as – “a standard approach to providing investment advice, including how the client’s risk profile is assessed through to a centrally agreed investment solution”.

The FSA originally identified some concerns in this area in 2012 as part of its Retail Conduct Risk Outlook which were further confirmed during their thematic review. This identified 75 per cent of advice provided by firms on CIPs to be either unsuitable or unclear.

The main failings were evidence of “shoehorning” into a one-size-fits-all approach, “churning” where inadequate consideration was given for overall individual client benefit, and increased costs that did not provide actual additional client benefit.

While the regulator confirmed in the workshop that these concerns remain, it recognises there are potential benefits for both client and firm in operating a CIP and felt the suitability of such a proposition is driven by being able to demonstrate an appropriate due diligence and adoption process as well as evidence of individual suitability.

It suggested that good practice would be to demonstrate a robust process for the selection and introduction of a CIP, which addresses:

• Client segmentation.

• Design criteria – what type of proposition? What does a CIP need to deliver? What service do you wish to provide?

• Impartial review of the market.

• Due diligence and selection.

• Integration.

This process would enable a firm to consider their existing and prospective client banks, establish the type and level of service they wish to provide and to identify the most suitable product and provider to achieve this.

In addition, the regulator shared some examples of CIP design which it felt would help prove individual consideration and offer a solution appropriate for all clients:

• Availability of preferred fund panel for transactional clients.

• Choice of a low-cost managed fund.

• Model portfolios – higher level of assets and investment experience.

• DFM – bespoke service.

A robust process to identify an appropriate provider to house a CIP is thought by the regulator to be a key factor in being able to demonstrate client suitability. This includes the consideration of the provider’s reputation/financial standing; their investment style, approach and performance; their approach to investment selection and due diligence; charges; and the functionality and support services available.

The integration of a CIP is an important element to a suitable advice process, so consideration should be given to how the ­implementation of a CIP may affect existing systems and controls with the need to update and review these on a regular basis to identify future client risk.

The use of a CIP, as with any investment, must also include a robust risk assessment process to establish the level of risk a client is willing and able to take. This will help determine the most appropriate solution available and the types of investment best suited to the client.

• Risk profiling – the use of “profiling technology” is not required, however it can be useful. The output from such risk tools is only a guide and should be challenged with wider discussion.

• Risk description – what does it mean to the client?

• Other factors – consideration for term, capacity for loss/other assets, standard of living.

• Asset allocation – how has this been established for portfolio or range of risk specific portfolios?

Demonstrating individual client advice when recommending a CIP remains a key indicator when the regulator assesses suitability. Therefore, there is a need for a structured and documented research process to consider a range of client solutions, a risk assessment process to ensure each and every client is invested according to their agreed level of risk and a suitability report that provides clear reasoning as to why the recommended CIP will meet the needs identified.

Tony Catt is an independent compliance consultant

Expert view: FCA Thematic Reviews

Tony Catt, compliance consultant, provides an outlook for future FCA reviews:

“The FCA is going to be focusing on due diligence and research in 2015. This may well involve thematic reviews. The main issue is the collection and maintenance of evidence of due diligence and research that is undertaken to ensure a good outcome for clients.

“Firms will need to be able to provide evidence of the processes that have been used in their research and due diligence. Robust processes should give a better chance of consistent quality of advice and good outcomes for clients.

“The FCA will expect to see a definitive, repeatable process in place. The firm should use the contact with the regulator as a positive opportunity to confirm that the due diligence and research it undertakes for all business is sufficient and relevant to each client.”