FSA sets out DFM rules
The FSA expects adviser firms to clearly spell out their relationship with discretionary fund managers to clients where there is no direct contract between the client and the DFM.
The regulator has published its final guidance on centralised investment propositions (Cips) and replacement business following a guidance consultation in April.
Cips are defined by the FSA as a standardised approach to investment advice, such as model portfolios, DFMs, and distributor influence funds. Replacement business means where advisers switch clients out of existing investments.
One of the main changes from the earlier guidance is the FSA has flagged up its expectations on how advisers should disclose their relationship with DFMs.
The FSA says it is aware of three broad structures firms adopt when using a DFM as part of a Cip. Adviser firms can arrange for the client to have a direct contractual relationship with the DFM, or hold the relevant permissions for managing investments and delegate the investment management to the DFM.
The third structure is where the DFM is carrying out the investment management, but there is no direct contractual relationship between the client and the DFM. Instead the DFM treats the adviser firm as the client, acting on behalf of the investor.
The FSA writes: “In this case we expect the advisory firm to explain the position clearly to its clients. In particular it should emphasise it is not carrying out the investment management itself and the discretionary manager is not treating the end investor as its client.”
The guidance was triggered after the FSA carried out a thematic review into Cips. The regulator reviewed 181 investment files from 17 firms which recommended a Cip. It found the quality of advice to be unsuitable in 33 cases and unclear in 103 cases. The quality of disclosure was found to be unacceptable in 108 cases.
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