Your Industry  

Pitfalls of delegating advice the wrong way

This article is part of
Guide to delegating advice

Pitfalls of delegating advice the wrong way

Like a coin, delegating advice has two sides, and the flipside is that doing it the wrong way can lead to some severe consequences for both adviser and client.

The biggest danger, of course, comes in the form of enforcement action from the Financial Conduct Authority.

In December 2015, the City watchdog announced it was investigating “a number” of financial advice firms which had delegated regulated activities, such as pension switching advice, to a third party.

Article continues after advert

According to a statement from the FCA, retail customers had been recommended to switch their mainstream personal pensions into self-invested personal pensions, which had underlying high-risk assets that, the FCA said, may have been “unsuitable”.

The statement added: “The authorised financial adviser firms did not personally contact customers or review whether the recommendations were suitable before they were sent out, despite being responsible for the advice provided.”

The FCA’s argument was that firms may want to operate new business models, but there is a significant risk of poor customer outcomes, which should be the primary consideration for any firm considering delegating advice.

As Tony Miles, business development consultant for the Personal Finance Society, comments: “A potential pitfall is consumer detriment as a result of sub-optimal advice, especially where extensive and ongoing due diligence of the delegated firm and/or their service offering has been insufficient to protect the interests of the client.”

Linda Todd, head of Bankhall Operations, says this particular type of arrangement carries significant risk for both the firm and its customers and should be avoided.

The warnings from industry commentators FTAdviser spoke to are unequivocal: the customer should not be put at detriment.

But there are other potential pitfalls, not just the risk of client complaints should the delegated advice go wrong.

Due diligence must be done - and done correctly.

Chris Hannant, director general of the Association of Professional Financial Advisers, says: “A firm needs to recognise they will ultimately be responsible for advice as a recommendation from their firm.

“They will need to conduct due diligence to ensure they are confident in the partner firm’s expertise and that they are competent and, where appropriate, regulated.”

Liz Coyle, compliance policy manager at SimplyBiz Group, warns: “You lose ultimate control of the advice given to your client. [But] as the ultimate owner of the client, responsibility for conducting the relevant due diligence into the third party sits with you.”

As Rachael Healey, senior associate of City law firm RPC, explains: “Whether or not there are substantive risks for regulated firms delegating regulated activities will depend in part on the due diligence the regulated firm conducts on the third party and whether or not that third party provides suitable advice.

“The risks for regulated firms are likely to come where they conduct little to no review of the work conducted by the unregulated adviser.”