When considering the relationship between financial planning and regulation, we need to be mindful that – at least in theory – not all of the processes and services experienced by the client are subject to detailed regulation. However, it is important to understand where the boundaries may be.

Which parts of your process are regulated?Contrary to common discussion, if the intent and likely outcome of your interaction with a potential client is regulated advice, then your client take on process is regulated, and needs to be compliant in every way. This includes disclosures, status, anti money laundering, the whole nine yards. The fact that you may spend a lot of time on pure financial planning – budgets, objectives, cashflow planning – is great for the client, but in reality, unless you are never going to discuss any regulated area at all, this valuable process is part of a regulated advice process, and should be treated in that way. This is not just box ticking, nor just for your protection, but serves to protect the client as well.

1. Corporate governanceMention corporate governance and most financial planning firms switch off immediately, because it is seen as one of those phrases that regulators love to discuss with big companies. And, of course, that is broadly correct. That does not mean, however, that small firms are automatically exempt from the need to ensure that their culture complies not only with the detail of the rules, but also the spirit of the rules as well.

A couple of points to consider

First, how do we avoid ‘groupthink’ in our firms? For example, how do we avoid the pitfall of all sharing the same experience and world view, so that we automatically make the decisions that everyone else in the firm would make? How can we get someone to challenge this – in a positive and helpful way?

There are too many options to cover here, but ideas already used successfully in small financial planning firms include:

• shadow boards
• non-executive directors
• client boards
• use of consultancies, such as compliance support firms.

There is no one correct answer, but there is some evidence that by including other voices and thoughts in the internal decision-making process, firms can make more considered decisions, which can provide help with positive outcomes.

The second point can be more problematic. It’s about culture, and very specifically the much vaunted ‘client centric’ culture that many aspire to. While morally laudable, there can be pressure on staff within such a culture to ‘do the wrong thing for the right reasons’. If we look at the evolution of firms as moving from adviser/planner centric through to client centric, then the best long-term outcome for both firms and clients is a process centric culture. This may sound like it’s too focused on compliance, but, informed by the right culture, it’s the safest and most stable model.

By considering the above two points – challenge and culture – small financial planning firms can be comfortable that they can meet the FCA’s expectations around corporate governance.

 

2. Due diligence

Issues to consider

Some have incorrectly identified ‘due diligence’ to be solely related to independence, and as such, ‘restricted’ advisers and planners are therefore exempt. This is not the case. The term ‘restricted’ can mean a myriad of things. What matters is that any advice must be suitable for the client, and without some form of research and investigation, it’s very difficult to show that any product, fund or platform recommendation is suitable for any client. So ‘restricted advice’ may indeed narrow the need for due diligence, but it cannot remove it.

Others have taken the regulatory position that as one FCA firm is entitled to rely on the facts set out by another FCA firm, this then means that if the counterparty – provider, fund manager, platform – is FCA-regulated, no due diligence is required. This is only partially correct.

Much of what is produced by these firms is not fact, but rather marketing. This will include claims that a fund is ‘low’ or ‘lower’ risk, as a good example. This may well apply to claims of superior performance based on back testing, or that an investment approach is suitable for ‘balanced’ investors. These are all opinions, not facts.

Our role is to sit on the client’s side of the table, and only proper, robust due diligence can ensure we do that. We’ve never seen a ‘due diligence’ pack that says: “Don’t use us, we are expensive.” And why would it? It’s a commercial world, and it’s not the providers’ job to look after our clients; that’s our job. Only by having a robust, two- stage process can we ensure that we meet our obligations.
It is vital to use independent data and information to support the filtering process

Stage one is the filtering out stage. By setting clear criteria, such as ‘We only consider UK-regulated, single asset, long only funds with ongoing charges of under 2%’, we can simply reject anything that does not meet this standard. Some old favourites will go on that basis, and that’s only right and proper.

Once the filtering is done, it’s time to look deeper. Do the claims stand up? Is the corporate governance in place? How does the underlying software stand up to pressure? How stable is the management team? Do they have the required skills?

A few thoughts on this part of the process. First, it is vital to use independent data and information to support the process. So use FE or Morningstar, for example, for funds.

Second, for bigger calls – which platform or specialist self-invested personal pension should you be using? Visiting the provider is really useful and important. What’s the culture like? How are the staff treated? You can still get the call wrong – we are not perfect – but which conversation would you rather have with clients? ‘I visited them’, or ‘we had lunch’?

In short, due diligence remains on the FCA radar, and it remains one of the most important duties to clients, even in these days of ‘me too’ funds. Due diligence applies to our choice of platform and the FCA expects us to choose our platform partners based on their suitability to our clients, not on simply their cultural match with a firm.

That suitability match can be made on a ‘segmentation’ basis – so for groups of clearly similar clients – but it does need to be made, and then kept under review.

3. Recruitment and employment

Let’s start with the easy part. Traditional recruitment of planning and advisory staff was based on a few narrow criteria – essentially, the ability to generate income, fees and qualifications. In the real world of small firms, these remain important. However, we’ve learned a few things over the years.

First, when recruiting an experienced adviser, the issue of ‘bringing a few clients’ has become more important. It’s no longer enough to accept the verbal assurance that ‘they are my clients, they will come with me’. You must establish the actual legal position in each case – the claim just made may or may not be actually or legally true – and then plan with the prospective recruit how they are going to abide by their agreement. We cannot condone or facilitate deliberate breaches of employment or service contracts. We are not human resource lawyers, and so we will usually require our prospective recruits to get written advice based on their specific position, and then base our actions on that advice.

The reality is that many clients may well follow their adviser, and in these days of social media, keeping in contact has never been easier. But we will probably have to plan for a period of at least six months before any professional contact can be made, let alone any dealing or advice given. Does the case for recruitment stand up to these constraints?

The second issue has been around for a long time, and it’s the old chestnut of ‘self-employed for tax reasons’.

We are hearing more and more cases where accountants are refusing to sign off on these arrangements, and insisting that advisers are actually employed. Going further, they are suggesting that calling an employed person self-employed may simply be a tax evasion technique, and thus caught by anti money laundering regulation!

The FCA does not regulate our tax system, so this is not directly about FCA regulation. However, it does take a close interest in the ‘fit and proper’ status of advisers and especially of business owners. With HMRC taking a more assertive interest in ensuring all tax due is paid, it would not take much for the FCA to take an interest in any cases where employers in the financial planning profession had been subject to prosecution or fines.

Our suggestion is simple. If you have self-employed advisers, get a written legal opinion, based on your contracts and your firms processes, as to how robust this status is, and the likelihood of HMRC taking hostile action. That way you either have a great defence, or can start to take action in a measured and commercial way.

In summary

Looking at the hotspots outlined above, it is striking the degree to which they are partially a reiteration of long-standing regulatory concerns – due diligence – but are mainly about running a firm as a firm, with good systems and controls in place.

Get those bedrocks in place, and dealing with regulatory concerns as they crop up is actually quite simple.

Views expressed in this article are those of the author alone and do not necessarily represent the views of the CISI.