Many firms are looking to expand. Some are looking for economies of scale, often it is to build assets under management to build value in the firm. To do this many firms look to expand by buying or merging with other firms. The FCA published some guidance for firms when undergoing such projects in February 2017.
Many firms are looking to expand. Some are looking for economies of scale, often it is to build assets under management to build value in the firm.
To do this many firms look to expand by buying or merging with other firms.
The FCA published some guidance for firms when undergoing such projects in February 2017 – ‘Supervision review report: Acquiring clients from other firms’
This guidance was published as a result of a review that the FCA conducted on firm’s practices on acquiring clients. The review focussed on communications to clients at the point of acquisition; integration of clients into the new firm’s client proposition and looking at the suitability of replacement business due to transitioning onto the new client proposition/ firm investment approach.
The findings were published under a number of headings:
Communications to clients
The FCA found the following examples of poor practices:
- Details of the services offered by the new firm and their charges were not issued at the start of the relationship
- Differences between what they were receiving and what they would receive by the new firm were not highlighted to the client
- Clients were not informed of any difference in VAT status
- Clients were not told that they did not have to take up the ongoing service being offered by the new firm
- Clients were not informed as to how they could complain regarding advice received by the original firm
Client Agreements
Acquiring firms must obtain the client’s agreement, i.e. obtain a new fee agreement, before providing and charging for their services as per the COBS rules. Reliance upon the old firm’s disclosure documents and agreements regarding payment of an ongoing adviser charge is not allowed. The client should be advised exactly what the adviser charges would be (including in £ and p) and what they can expect to receive for this money under the new firm.
Client instructions to the product provider to pay any ongoing adviser charge must be provided (and evidenced on file) so that the new firm can receive these monies.
Furthermore, if any initial adviser charge is to be applied for changing the client’s existing portfolio to a new proposition, they must be informed of those charged before the work is undertaken.
Service Integration
Where a firm has a clear strategy of buying firms it is expected to be clearly documented and defined. The firm must be able to demonstrate that it has the resources to integrate clients into the firm since an ongoing adviser charge can only be applied is the firm is proactively delivering a service to the client. If an ongoing service is not being provided, then the firm must stop taking the income and refund any monies taken to the client. (This is the case even when a firm is not taking over a client bank).
Conflicts of Interest
Examples of poor practices provided in the guidance included instances where the acquiring firm would offer to pay more when the client bank held specific investments. The FCA also saw practices where the adviser remuneration would be dependent on how much income would be generated as a result of moving clients existing investments onto the new firm’s investment proposition.
Appropriate charging structures
A firm’s charging structure should reflect, as much as possible, the total adviser charge to be paid. Where advisers are allowed to apply discounts, this can distort the firm’s schedule of fees meaning it may not be a true representation of the actual charges incurred by clients. In some instances, firms did not monitor the frequency of the discounts. This is not to say that discounts cannot be applied but they need to be the exception rather than the norm, with it documented as to why the client is receiving a discount.
Replacement business
Switching a client’s portfolio onto the new firm’s investment proposition must be in the client’s best interests – not the firm’s. All relevant costs must be considered i.e. what are they paying now compared to new the investment strategy. Reference was given to FG12/16 ‘Assessing suitability: Replacement business and centralised investment propositions’ which was first published under the FSA in 2012 but is still relevant today.
Conclusion
Therefore, any firms looking to acquire firms in the future should be very mindful of this guidance and factor the points to avoid when in negotiations, looking at resource and the practicalities of moving clients across to the new firm.