What the regulator expects from advisers’ duty of care

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Taking care of outsourced clients

What the regulator expects from advisers’ duty of care

The Financial Conduct Authority has been consulting on whether there should be a formal concept of duty of care companies should abide by.

But compliance consultants claim that many advisers already abide by the principles that the FCA sets out in its Discussion Paper 18/5, which describes some basic foundations that would make up that duty of care.

On top of this, while the principles provide high level “fundamental obligations” that advisers need to adhere to, there are more specific day-to-day rules that spell out clearly what an adviser should be doing, under the conduct of business sourcebook.

But as advisers increasingly outsource investments, the prospect of a duty of care raises questions about how this process will be affected.

For example, this could be used to manage the conflicts of interest faced by advisers using a discretionary fund manager. 

Gary Teper, head of investment management at Charles Stanley, says that when it comes to outsourcing investments, independent financial advisers “should be looking holistically at their clients’ overall financial needs and objectives, and their focus on this point is paramount. 

“When looking at a [DFM] provider they must be assured that they are the right fit in terms of company (many of our clients like the fact we are an independent company), but also the individual or team who will be managing the money in the way that meets the client’s needs – managing the portfolio suitability.”

Track record

Neil Walkling, managing consultant at Bovill says that the most important thing to consider when looking at using a DFM or model portfolio is to do proper due diligence and research on the companies you are about to use.

He says: “Some IFAs recommended clients invest in Strand Capital [which collapsed in 2017]. The discretionary manager was recommending clients invest in illiquid and highly risky, dubious investments, and some of these investments were run by people running Strand Capital as well.

“If you’re an IFA you have to make sure you understand the DFM you’re recommending is designed for what you’re investing your client’s money in.

“Do you understand what you’re going to do with your client’s money and have you investigated the track record of this DFM to make sure they’re a financially strong and reliable business?”

The FCA’s discussion paper spells out some of these principles that appear in the principles handbook, which advisers are already abiding by.

And it seeks to make many of them the basis of a more formal duty of care, if it decides to push ahead with it.

The first of these, principle two, means that a company “must conduct its business with skill, care and diligence”.