financial regulation briefing
10 Feb 2017 FCA supervision review report: acquiring clients from other firms - 10 key messages
On 1 February 2017, the FCA published a supervision report which set out the findings of its recent review of investment advisory firms' practices when acquiring clients from other firms. The sample size was not the largest: the FCA identified nine firms who had acquired clients from other firms and conducted a review of six of those. Despite this, the key finding was that none of the firms were able to consistently show that clients' needs were suitably considered. In particular, firms did not focus on how clients were impacted by the acquisition nor did they communicate effectively with clients. Clear lessons are set out in the FCA's report, particularly on adviser charging structures and disclosures, which all advisory firms (whether acquiring other firms or not) would be advised to consider. We list the 10 key messages from the regulator below:
- Details of services offered by a new firm and levels of charges must be provided to clients at the start of the relationship.
- Differences in the service level offered by a new adviser must be explained to clients.
- If there is any difference to the VAT status of the ongoing service charge, this should be highlighted to clients.
- Clients should be clearly and expressly informed where responsibility for historic advice is taken over by the new firm.
- Firms should recognise where an original agreement prevents services and charges from being transferred.
- If a new agreement is required, firms must have the clients' agreement in place before arranging for facilitated adviser charges to be redirected to their own bank accounts.
- Communication with clients post-acquisition must include detailed information sufficient to meet adviser charging requirements (in the FCA's review some firms made no mention of how a charge may change if it was calculated as a percentage, for example).
- An acquiring firm must obtain and validate instructions from a retail client in relation to an adviser charge.
- Firms must have a strategy for acquisitions, with a focus on the short and long term capabilities of the acquiring firm.
- Firms should consider any conflict of interest that an acquisition may lead to. For example, the structure of payments offered to sellers could be an inducement, the acquisition could create a bias towards certain investments or the adviser remuneration structure may lead to conflicts.
The FCA has said that firms subject to its review have taken steps to improve their practices but all firms should consider the FCA messages in this report on their business. Key amongst those is adviser charging disclosures which looks ripe for future regulatory scrutiny if this report is anything to go by.
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This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.