In a recent Supervision Review Report about acquiring clients from other firms, the FCA says firms have not shown that client needs have been properly considered.

Due to the increase in acquisition activity in the investment advice market as a result of the Retail Distribution Review, the FCA has assessed how investment advisory firms treat clients or client banks acquired from other firms.   In this short briefing, we set out a summary of the key findings for firms.

Key Findings  

The FCA reported that while there were some good practices, it was ‘disappointed…that none of the firms assessed were able to consistently show that clients’ needs were suitably considered’. It found that firms did not focus enough on how clients would be impacted by such a transfer and instead focused more on the commercial benefits.  The FCA stressed the value of firms following its guidance in FG12/16 ‘Assessing suitability: Replacement business and centralised investment propositions’ from July 2012.

Communications to clients

The FCA found that acquiring firms' communications to clients did not provide enough information to meet the requirements of Principles 6 and 7 of the FCA's Principles for Business (which require a firm to pay due regard to the interests of its customers and treat them fairly and pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading). The report notes that acquiring firms did not provide to clients information about:  (1) their services and charges at the start of the relationship; (2) the differences between the services offered by the acquiring firm compared to the original firm; (3) any differences to the tax (VAT) status of the ongoing service charge; (4) the ability of the client to opt-out of any ongoing services; (5) any historic advice responsibility taken on by the acquiring firm; and (6) the complaints procedure in relation to the original firm’s advice.

Client Agreements

The FCA emphasised the need for acquiring firms to obtain the client's agreement before providing and charging for their services in line with COBS 8.1.3R and COBS 6.1A.  The FCA found that acquiring firms were relying on existing agreements between the original firm and client, failing to realise that these agreements were invalid because the acquiring firm was not a party to them.  Some firms did provide clients with information about their services and costs following the acquisition.  However, many acquiring firms simply told the client that the services provided and charges would remain the same as their previous advisers without giving further details.  Some  acquiring firms simply asked clients to contact them if they did not wish to proceed with the service.  This approach was not sufficient to meet adviser charges requirements under COBS 6.1A.

Service Integration

The FCA noted that it expects acquisition strategies of firms to be clear and well defined.  This means they should consider how the needs of the clients being acquired can be met by the acquiring firm in the short and long-term.  It noted that, in some cases, the service provided to clients by the acquiring firm is different to that provided by the original firm and that potential issues can be addressed by scheduling annual reviews with clients and carrying out more frequent rebalancing exercises for acquired clients.   In relation to ongoing services, the FCA said that firms should be taking steps to ensure that clients are not charged for services the acquiring firm cannot or is not providing.

Conflict of Interests 

The FCA’s Report found instances of acquiring firms offering to pay more for clients if clients had specific investments; adviser remuneration being structured to incentivise advisers to make personal recommendations to clients to take a particular course of action; and adviser remuneration being calculated partly in line with the level of initial adviser charges for replacement business.   These practices raised concerns of conflicts of interest.  The FCA emphasised the need for firms to have in place appropriate systems and controls to ensure advisers act in the best interests of clients. 

Appropriate Charging Structures

The FCA stressed the importance of firms adopting a procedure whereby they disclose to clients their charges before any services are provided.  Some firms allowed advisers the discretion to apply discounts which resulted in the firm’s schedule of fees being inaccurate and some firms were not clear to clients and staff as to whether a charge will apply if a recommendation is made to withdraw from / invest in a particular investment.

Replacement Business

The FCA found that in relation to investment business transfers or switches, firms may not always be considering the impact of contingent adviser charges on the future value of the client investments.  It stressed that all relevant costs incurred by the client should be considered by firms in determining the suitability of the recommendation to switch or transfer investment business.

Next Steps and Comments

The FCA expects all relevant firms to now consider whether their own policies, procedures and practices need to be improved in light of the contents of the report.

That said, we think the FCA's findings go beyond simply requiring firms to consider their own policies and practices.  We consider the findings are likely to have a significant impact on M&A activity in the wealth management space.  More specifically, firms involved in any acquisition activity will need to build in additional time (and costs) as part of any due diligence to ensure they meet the FCA's expectations in this area.