A. While the use of a DFM can produce many positive outcomes for companies and their clients, there are many factors to consider.
A full risk assessment should be done ahead of choosing the DFM, to determine how the relationship will operate and who will be the client of the DFM.
This will either be your client – where your company is acting for the client (agent of the client), or your company – where the company is acting as the client (agent as client).
No additional permissions are required by a company under either of these options.
But companies should remember they must not provide any instructions to a DFM under its own discretion.
So all actions instructed by the company to the DFM for a trading activity must first be agreed with the end investor (the client of your company).
In each of the examples above, the DFM will apply exemptions from within the Financial Conduct Authority Handbook to rely upon the information it receives from your company when you make the introduction.
A DFM has the same responsibility to ensure it understands the investor’s needs, objectives and risk profile to determine the suitability of the investment solution, before undertaking any investment activity.
It is these exemptions that they rely upon to avoid that regulatory requirement.
The exemption will apply differently depending on the nature of the relationship.
Under agent of the client, your client is also a client of the DFM. The DFM applies the exemptions in the Conduct of Business Sourcebook, specifically ‘reliance on others’, to act on your instructions.
This means you will need to carry out a full suitability assessment for the DFM to rely upon.
Companies should consider taking the following actions:
• Always check the contractual agreement before engaging with the DFM.
• Understand how the DFM relies on the information you provide.
• Seek assurance that only funds/financial instruments suitable for retail client investors will be included in their investment propositions.
• Identify any additional reporting requirements that have been mandated to the company based on the contractual agreement.
When it comes to ‘agent as client’, you will become the client of the DFM and represent the interests of your client.
This is likely to reduce the protections offered to the client and increase your company’s responsibilities. Companies should therefore:
• Always check the contractual arrangement before engaging with the DFM.
• Ensure the ‘agent as client’ model is aligned to how you wish to assume regulatory responsibility when carrying out regulated activities.