Recently there has been an uptick in investment advice firms looking to make some material changes to their propositions, TCC’s regulatory experts report.

For example, some advisers are looking to introduce in-house investment platforms or to manage portfolios on a discretionary basis, to increase their control over the investment decisions and the customer experience.

Be sure to appreciate the implications

The benefits to the customer can be significant in terms of both cost and service enhancements, however, it’s important to fully understand the implications of such a change to a business model. Firms need to be aware of the preparatory steps required to ensure you have the right governance, systems and controls around any decisions to remodel the customer proposition as the repercussions would be a raft of ‘new’ rules to comply with.

The FCA will consider your preparedness when reviewing your application to vary your regulatory permissions. Here we set out five key questions that it’s important not to overlook:

1. Will you need to vary your regulatory permissions and what would be the impact?

Changes to regulated activities may require a variation in permission and may ultimately change the firm’s MiFID status and financial resource requirements. For example, firms intending to undertake portfolio management (exercising discretion and making investment decisions on behalf of the customer) would require regulatory permission to manage investments in addition to other permissions needed to give effect to investment decisions and provide investment advice.

However, firms that hold Article 3 exemption from MiFID II should note that the exemption is conditional on certain qualifying conditions relating to the regulatory permissions that the firm holds, and a variation of permission to include ‘managing investments’ (and certain other regulated activities) would take the firm outside of the qualifying conditions and subject to MiFIDPRU and ICARA.

2. Do you have the right systems and controls in place?

Depending on the nature of the business model, the changes made to regulated activities could be minor or significant, and it can be complex to navigate the rules. We recommend that before firms make changes to the business model, you should identify and assess the risks along with whether you have the right systems and controls in place ahead of changes. Firms also need to put customers at the heart of their business model and mitigate risks to good customer outcomes to meet the obligations under Consumer Duty.

3. How are you notifying customers of the changes?

Changes to the business model are likely to alter the foundations of the existing customer agreement in terms of the services, costs and future information that customers can expect to receive. Firms should revisit their fair value assessment when changes are made to the proposition. It’s also important to assess the suitability of the new proposition and avoid any risk of shoehorning.  

Firms should consider the need to notify customers about any changes in a way that meets the customer understanding outcome and whether express consent is required. This includes enabling customers to comprehend the proposition they are signing up for whilst understanding what it costs, the benefits they will receive, and importantly what the charges won’t cover. It’s also vital to have a plan for the steps you will take when either the customer does not respond or does not take up the new service.  

4. Do you have the skills, competence and capability needed to deliver the new proposition?

You should review the skillset of management and staff and understand where there may be any gaps in capability or experience that need to be addressed – for example, if moving from an advisory to a discretionary model. That type of exercise shouldn’t be a ‘once and done’ event and will continually assess to scope whether your business has the necessary skills, capability, and resources on board. It’s important to also ensure SMCR obligations are met, and that relevant staff have been assessed as fit and proper for the roles assigned to them. You may need to invest in skills training or resources, which can take time to complete and embed ahead of the business model changes.

5. Do you have the right governance processes in place?

Proposed business model changes will impact the risk profile of your business, and its risks to customers. Meanwhile, the Consumer Duty requires firms to proactively deliver good customer outcomes and not wait for issues to arise before acting – ensure you are clear on how the Duty applies to new activities and that foreseeable harm is avoided.

Product governance obligations should be met by identifying your target market and the risks of customer harm associated with the business strategy – along with proactive steps to mitigate the risks to customers. Firms will need to update their fair value assessment and check that the business model enables customers to meet their financial objectives. The FCA has issued guidance on good and poor practice in its thematic reviews of Consumer Duty, and it’s vital to understand how you measure up to those standards.

External support to navigate the detail

Without the right preparation, changes to your business model can create more regulatory and customer risks than they solve.

TCC can support you in navigating the complexities of the FCA’s regulatory permissions regime and understand the risks to customers and how to deliver good outcomes. Get in touch to find out more.