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Client interests must come first during acquisition of other firms, says FCA

ANALYSIS: The Financial Conduct Authority (FCA) published a review last month of how investment advisory firms manage the transfer of clients during the acquisition of another firm, and stressed that the impact on clients must be considered and their needs protected.02 Mar 2017

In a review of six acquisitions, the FCA looked at how the clients had been told of the acquisition, how they had been integrated into the new business, and how appropriate the recommendations they were given had been.

Some firms are too focused on the commercial benefits of an acquisition and fail to consider the disadvantages for their new clients, the FCA found. It was particularly concerned about suitability, inducements, conflicts of interest, and a lack of transparency in adviser charges.

Suitability

None of the firms assessed by the FCA consistently gave suitable consideration to the needs of acquired clients.

In particular, the FCA said, when an acquiring firm uses a centralised investment proposition (CIP), or offers an in-house investment product, there is a risk that it will give unsuitable advice to its new clients. Products suitable for existing investors may not be right for the incoming investors, it said, and firms should be tailoring their advice to the new clients' needs and objectives.

Firms do not always realise that some client contracts might not allow ongoing services to simply be transferred to the new owner, the FCA said. The acquiring firm must get client agreement before providing and charging for services, while complying with FCA rules on the disclosure of advisor charges and the services that this covers.

The FCA also reminded firms of their obligations in respect of unfair terms under consumer protection legislation. The firm must ensure that any new product is suitable for the client and, when recommending transferring or switching investments, compare the costs of different solutions and the impact of any charges on the future value of the clients' investments. If there are potential disadvantages to new clients, the firm must change its practices to address this.

Inducements

The payment structure to vendors in the period leading up to an acquisition can turn into an inducement to those vendors, the FCA said. It has noticed instances where acquiring firms offered to pay a higher sum if prospective new clients held specific investments, which is of course an incentive for the vendor to promote those particular investments, it said.

Conflicts

Vendor payments and adviser remuneration plans that incentivise particular recommendations can create a conflict of interest, and firms need to have systems and controls in place to monitor and manage this, the FCA said.

Charges

The FCA was prompted to undertake this review by a spike in acquisitions in the investment advice market since the Retail Distribution Review was introduced in December 2012. Many firms still lack a clear policy on charging for replacement business, where an advisor recommends that a client switch to a different investment, and were often in breach of the conduct of business rules.

Firms need to develop charging structures to calculate adviser charges for every retail client, and make this information available in a way that is clear, fair and not misleading. Under the conduct of business rules firms need to disclose the total advisor charges payable, and what services will be provided for those charges. This must be done before any services are provided.

In an acquisition, therefore, this information has to be given to the new clients immediately and it is not good enough to say that charges will continue as before. Firms must outline the charges in detail and spell out any differences between the old firm's services and the new.

The FCA also looked at platform service providers who facilitate the payment of adviser charges. These have to obtain, and validate, instructions from any retail client on an adviser charge and this must be done afresh for clients who have been acquired.

The FCA's concern over transparent charges echoes its interim report on its asset management market study. Part of that report looked at how intermediaries, such as platform providers, affect competition and charges in the asset management market, and found that platform charges do not correlate with fund charges.

The range of different platform charges means that the total cost can vary significantly depending on the investment route that clients choose, rather than on the service being provided, the FCA said. Further work is needed on the value for money platforms provide to end consumers, it said.

Reminder

The report is a reminder that the FCA is scrutinising charges in investment funds and pushing for more transparency, clarity and fairness. Firms must act in the individual client's best interests, and provide information that is fair, clear and not misleading.

In the light of the report firms should assess whether they need to improve their own practices and procedures when acquiring clients. 

Elizabeth Budd is an asset management expert with Pinsent Masons, the law firm behind Out-Law.com.