Where are the lines of responsibility when recommending MPS solutions? The Timebank’s Damian Davies has some strong views

Where are the lines of responsibility when recommending MPS solutions? It’s an important question and one which The Timebank’s Damian Davies believes requires some action as he explains below.

With their take on the occasional ‘Dear CEO’ letter that comes out of the FCA, The Timebank shares their latest addition to our series of ‘Dear Regulator’ letters that represent just some of the thoughts and ideas on the direction of travel that Team Timebank believe the industry might like to see the regulator heading towards.

On their agenda this month, The Timebank’s Damian Davies raises concerns about the blurred lines of responsibility when recommending MPS solutions.

Dear Regulator,

 
 

There is no doubt that Model Portfolio Services (MPS) can provide good outcomes to the right clients.  

Thanks to the ability to access MPS via platforms, increased competition and a reduced cost to clients, they are an increasingly attractive investment option for advisers to recommend. 

We are concerned, however, that the conflicting nature of the two different relationships the arrangements have with advisers and clients could create harmful outcomes for clients in the current regulatory environment.

 
 

Agent as Client (AAC) or Responsibility Of Other (ROO)

There are two ways these arrangements are structured; Agent as Client (AAC) or Responsibility Of Other (ROO).

Before going further, this letter is not about the merits of AAC or ROO.  That is a separate, more fundamental debate.    

 
 

Instead, we would like you to provide more clarity on how the adviser can manage their investor’s understanding of the very subtle, but ultimately fundamental, differences between these relationships. 

In a world where initial and ongoing suitability requirements are so clearly laid out, it feels like the differences between AAC and ROO may have fallen between the cracks.

Suitability

 
 

Currently, advisers follow the same suitability process when recommending AAC or ROO MPS to their clients. 

It makes sense to have similar suitability requirements when recommending MPS which operates on a ROO basis to any other regulated investment product; The Adviser is responsible for ensuring it matches the client’s requirements and circumstances. 

The MPS provider in this situation has a direct relationship with the client, who is assumed to be a Retail Client. The MPS manager is also responsible for ensuring the portfolio matches the associated risk and meets the portfolio’s criteria.

 
 

However, with AAC, the Adviser is the client of the MPS provider and is treated as a Professional Client. 

The relationship between the investor and the MPS provider is therefore different than under ROO. 

The ultimate client, the Investor, has no direct relationship with the MPS provider. 

 
 

At the same time, the AAC relationship will see the adviser as both manufacturer and distributor for consumer duty, PROD and MiFID.

From the client’s perspective, the differences between these relationships could be difficult to understand. 

If, however, an issue arises later the very difference is what will cause a bigger problem.

 
 

As a first step, it might be useful for you to issue clarification on what information is required on the different relationships.  Also, who should be obtaining and keeping the information depending on where they are in the different relationships. 

When we have undertaken due diligence for our clients, we have asked MPS providers about the basis of the relationship they offer. 

We press those that offer an AAC by asking what prevents them from offering an ROO relationship.  The response is often that they say that they are unable to gather sufficient information to comply with suitability requirements.

 
 

This feels like a great potential for client harm, where both parties could be assuming responsibilities lie with the other.

More fundamentally, is it time to anticipate the potential problem and separate these two different ways of delivering MPS solutions to clients?

We feel that separating these services, so that they are not bunched together under the title ‘MPS’, will be the easiest way to help everyone understand the fundamental difference.

 
 

Potentially, advisers and MPS managers working on an AAC basis may need:

  • Specific investment qualifications
  • Standards for recording and evidencing their research, such as the frequency that MPS providers publish their investment strategies and performance,
  • Guidance on the acceptable minimal levels of communication with clients for both advisers and MPS providers.  

This may involve some additional costs, but these should be minimised and offset by the reduced risk of a scandal, lower PI risks and less chance of claims against the FSCS. 

We look forward to collaborating further to reduce harm and improve outcomes for consumers.

About Damian Davies

Damian’s career in financial services started back in 1997 as a young IFA before then finding his calling as a Paraplanner.  

In 2002, Damian started an outsourced paraplanning business called The Timebank. The Timebank has developed to be one of the primary sources of support available to advisers and planners and looks after clients in the UK and overseas.

Damian says that since 2002, one thing is clear; “There is an unstoppable evolution of financial advice from a sales industry to a professional service.”

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