Make no assumptions when designing your CIP
Steve Bailey of ATEB Consulting examines the regulatory implications when designing or reviewing a centralised investment proposition (CIP), including research, independence and platforms. And don’t think that using a DFM is a panacea, he says.
A standardised approach to providing investment advice is how the FSA, in its finalised guidance paper fg12_16 ‘Replacement business and centralised investment propositions’, described a CIP. Whether or not you operate a CIP, the document is a ‘must read’.
So, what is a CIP? There are two component parts:
• The investment advice vehicle(s); and
• The standardised approach.
The vehicle could be to an externally managed fund, an ‘in house’ model portfolio, a DFM or a DIF.
The standardised approach could be a default position whereby, for example, the CIP is the first consideration for clients with over £n to invest and an Attitude to Risk between x and y.
Another characteristic of a CIP is that it is centrally researched, avoiding the need for individually researched client solutions. Therefore, if your firm has a repeatable process resulting in a standard solution, you are running a CIP.
A well operated CIP provides numerous benefits, such as central and expert control, perhaps through an investment committee, and a consistently applied advice process.
There are pitfalls however and the guidance highlights three common suitability failings:
1) Shoe horning clients into a ‘one size fits all’ solution;
2) Churning without adequate consideration; and
3) Additional costs with few or no actual benefits for the client.
Where independence fits in
There is an independence angle of course. Having a default position is fine, but you must keep an open mind and consider each case individually, understanding the CIP’s limitations. Using a CIP as the ‘soft option’ is not acceptable.
It is important that you don’t inadvertently restrict yourself and can demonstrate that other solutions have been considered. COBS 6.2A.17G states ‘In providing unrestricted advice a firm should consider relevant financial products other than retail investment products… examples of which could include National Savings and Investments products and cash deposit ISAs’.
And remember, to be independent, research must be comprehensive, fair, unbiased and unrestricted. This extends to platforms, product providers and retail investment products, therefore you should ensure that any research tools or panels are sufficiently broad.
One or more platforms?
The FCA states in TR14_05 ‘Supervising retail investment advice: Delivering independent advice’ that ‘It is likely to be very rare, if possible at all, that a firm could use one platform for all clients and meet the independence rule’. This is substantiated in COBS (see COBS 6.2A.4A) although the FCA does concede that one platform could be suitable for the majority of clients that have similar needs.
Care should be taken when using platforms unnecessarily. We have seen a single fund placed on a platform with no tangible benefit other than ease of administration for the firm. Remember, the rules are about the ‘client’s best interest’, not the firm’s.
DFM is not a panacea
Don’t assume that by using a DFM you are acting in the client’s best interest and independently. You must ensure that sufficient due diligence is recorded to support the choice of DFM and that contractual obligations are defined, such as ATR and asset allocation reviews – the firm’s and the DFM’s responsibilities must be clearly understood by you, the DFM and the client.
You should ensure that your attitude to risk process is ‘mapped’ across into any CIP. This is particularly relevant for externally managed solutions like a DFM, where both you and the DFM use separate ATR processes. The FCA often assesses files as unsuitable due to unclear risk and portfolio misalignment.
Can you have more than one CIP? Yes, of course, and particularly for firms with a broad range of client profiles. Indeed, more than one CIP gives added credence to independence. What is crucial, however, is that you have alternative options available, be they other CIPs or individually researched solutions. Shoe horning is a ‘go straight to jail’ scenario.
Designing your CIP
So, what should you consider when designing a CIP?
• Firstly, start with the end in mind; what is it you want to achieve?
• To do this, you’ll need to analyse and segment your clients and then define a set of criteria required by each segment; for example, maximum costs, range of funds, administration capabilities;
• You can then apply each segment’s criteria to your CIP research.
• Ongoing, regular due diligence is very important and should be well documented and robust;
• All staff should be trained in the CIP’s use and limitations;
• To enable analysis of CIP usage, good management information is essential.
Finally, we recommend a clear, consistent and documented pathway that defines a track from first contact to suitable solution. Using an adaptable, structured investment process for this purpose, alongside trigger questions and flowcharts can help you determine the most appropriate client pathway.
Remember, any CIP recommendation must clearly evidence suitability, for each and every case.
Click here to read ATEB’s article on trigger questions
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