It may not be feasible to fit a square peg into a round hole, but it is possible to shoehorn a client into an investment proposition that isn’t entirely suitable. ‘Shoehorning’ has been a perennial bugbear for the FCA ever since its predecessor – the Financial Services Authority (FSA) – raised concerns about the subject more than six years ago.
That warning caught out some intermediaries, as Mike Barrett, consulting director at the Lang Cat, notes: “The regulator was very clear around its expectations. Shoehorning someone into something that isn’t quite suitable, and not being clear around the costs when moving money from an old provider into the process, was very clearly highlighted as poor practice.
“I think there were a few firms a few years ago that got picked up and were close to enforcement,” he adds.
And yet several years later, the issue remains a live one. That’s perhaps unsurprising given the increase in the number of intermediaries who had started using centralised investment propositions (CIPs) in the years that followed.
In August 2017, a survey by Equifax Touchstone revealed that more than four out of five advice firms (82 per cent) now use CIPs, with appetite varying based on the size on the firm: 66 per cent of those with fewer than five advisers have a CIP, rising to 83 per cent for companies with more than 50 advisers. This growth means the finalised guidance issued by the FSA in 2012 (see Box One) is far from a museum piece.
Almost four years after the 2012 paper was published, another review into the CIP market uncovered further flaws. The FCA found that the research and due diligence processes of some firms lacked structure, leading to potentially skewed results, whereas others were ambiguous on the criteria they used to assess client suitability against their services.
So how can advice firms ensure their practices are up to scratch?
Chris Metcalfe, managing director at IBoss, which provides outsourced fund management services, says: “The best way to avoid the accusation of shoehorning is, first, to have well-documented client files demonstrating suitability, most probably for clients in similar situations with similar needs. This can be documented and clearly defined if advisers undertake a client segmentation exercise, which needs to be reviewed on an ongoing basis.
“Second is being able to demonstrate which clients the CIP was insufficient for, showing where a bespoke or alternative offering was most appropriate, and knowing the full extent of the CIP range of solutions available in the market at any given time.”
