Regulator’s view of delegating advice

The Financial Conduct Authority’s comments (FCA) have been incontrovertible.

It told FTAdviser: “We urge authorised firms to consider the significant implications that entering into this type of arrangement could have on their professional reputation and future livelihood.”

It is not the act of delegation in and of itself that has attracted the attention of the regulator, but the two-headed beast of delegating in the wrong way: the lack of due diligence and process, and the resultant poor consumer outcome.

Just because the initial firm may not have the right qualifications, systems or expertise, and therefore they outsource, does not mean they have delegated all the responsibility away with the client.

The FCA explains: “While it is attractive to develop new business models, improper delegation of authorised activities may carry significant risks of poor consumer outcomes.”

Some advisers may feel constrained by the limits of their own firm’s capabilities, and need to outsource, but the FCA is not saying not to delegate advice, or not to outsource.

The regulator has a responsibility for the conduct supervision of all regulated financial firms Tony Miles

What it is saying is advisers must do due diligence, must ensure that they are outsourcing where possible to an authorised entity and must, above all, ensure there will be no detriment to the consumer.

If not, then there will be the potential for enforcement action as all the onus for the advice rests squarely on the shoulders of the primary adviser - the one doing the delegating.

As the FCA spokesman clarifies: “Some financial adviser firms and associated individuals have been referred to our enforcement division because they may have breached the FCA’s requirements in relation to the advice provided to customers.”

As Chris Hannant, director general of the Association of Professional Financial Advisers, says, “The regulator is right to be worried if unregulated entities are conducting a regulated activity and giving bad advice on bad investments.

“What is of concern is that advisory firms are not held responsible for the activities of other firms with whom they have no relationship and for whom they have no responsibility.”

Tony Miles, business development consultant for the Personal Finance Society, says: “The regulator has a responsibility for the conduct supervision of all regulated financial firms.

“Given it has stated that it is aware of some financial adviser firms whose business model has been deemed by the regulator to be based entirely on the delegation of the entire regulated activity of providing advice to an unregulated third party, then the FCA would have no option but to investigate and refer such firms to enforcement, where it sees a potential breach in the regulatory requirement in relation to the advice provided by a client.”

He suggested that in the context of the pension freedoms, and thematic review 15/7, titled Delegated Authority: Outsourcing in the General Insurance Market, as well as the imminent creation of a secondary annuity market in 2017, “we may see further potential opportunities for improper delegation, dependent upon how this market operates in practice.”

Rachael Healey, senior associate for City law firm RPC, says it is not only the FCA that is concerned about advisers delegating advice but also the Financial Ombudsman Service.

She explains: “The Fos appears to want to plug any potential gap in the advice chain where unregulated advisers, themselves not subject to the jurisdiction of Fos, have been involved.”