1 A threesixty guide to June 2024 Relationships between advisers and Discretionary Investment Managers threesixty
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3 Relationships between advisers and DIMs Chapter one Relationships between advisers and discretionary investment managers Background The Consumer Duty Regulatory background Selecting the right investment solution Discretionary investment management propositions Platforms Research and due diligence Professional Indemnity (PI) insurance Product governance (PROD) Chapter two Structure of arrangements - Agent as client Structure of arrangements Client agreements Suitability obligations Reporting to investors Charter three Structure of arrangements - Reliance on others Structure of arrangements Client agreements Suitability obligations Reporting to investors Conclusion Appendix Appendix one - Checklist - Adviser firm Appendix two - Checklist - DIM Appendix three - Consequences of categorisation as a professional client 4 5 6 8 10 10 12 13 14 15 16 17 19 21 22 23 24 26 27 28 29 31 32 35 38 Contents
4 Relationships between advisers and discretionary investment managers The purpose of this guide, which is being issued jointly by threesixty services LLP, DFM Connect and PIMFA, is to remind firms how arrangements between advisers and Discretionary Investment Managers (DIMs) can be structured and to highlight some of the pros and cons of each option. Chapter one
5 Relationships between advisers and DIMs In October 2021 threesixty services LLP, DFM Connect and PIMFA jointly published a paper to remind firms how arrangements between advisers and DIMs can be structured and to highlight some of the pros and cons of each option. This paper has been reviewed and updated taking into account the Consumer Duty rules. More detailed information about how the Consumer Duty impacts advisers and DIMs can be found on the websites of both threesixty services LLP and PIMFA. Background In June 2019, The Personal Finance Society (PFS) in conjunction with Diminimis published a guide called ‘Agent as Client: What you need to know’. This identified important issues for advisers to consider when setting up relationships with Discretionary Investment Managers (DIMs). In response to this paper, in October 2019, threesixty services LLP published its own guide to show how relationships between advisers and DIMs can be structured. The best way to structure arrangements between adviser firms and DIMs remains an important area for debate, particularly where advisers recommend Model Portfolio Services (MPS) hosted on platforms. Where a DIM makes their MPS available on third party platforms, the DIM is likely to have no knowledge of the underlying client (investor), with the result that these arrangements are typically structured on the ‘agent as client’ basis. There remains significant growth in this marketplace. Under the Consumer Duty, adviser firms and DIMs need to be able to show how, in structuring the arrangements in the way in which they do, the four Consumer Duty outcomes are met. There remains no right or wrong answer on how relationships between advisers and DIMs are structured. It is up to adviser firms to decide how best to structure arrangements with their clients, including relationships with any DIMs they invite to assist in the delivery of services to their clients. At the heart of this issue lie the client’s best interests, ensuring customers are treated fairly, and the four Consumer Duty outcomes. Both DIMs and adviser firms need to consider how the ultimate outcomes are met for investors when setting up these relationships. Advisers can work with DIMs in many different ways. Traditionally, advisers would refer a client to a DIM and the DIM would take full responsibility for all aspects of the client take-on process, including full Know Your Client (KYC) information and associated assessments. However, the Retail Distribution Review (RDR) introduced a ban on referral payments between advisers and DIMs which has led to advisers and DIMs working more closely together in partnership rather than operating on a simple referral basis. Chapter one - Relationships between advisers and DIMs
6 Relationships between advisers and DIMs Where an adviser firm chooses to use the services of a DIM, both the adviser firm and the DIM have their own regulatory obligations, including compliance with the Consumer Duty requirements and suitability obligations. The obligations on each party will depend upon the nature and extent of the respective services provided. Both parties should be clear about the services they are providing and the obligations they assume as a result. If either or both parties are not clear, there is a risk that clients may receive unsuitable advice and/or have their portfolios managed inappropriately. The Consumer Duty The Consumer Duty aims to set higher and clearer standards of consumer protection across financial services. It requires firms to put their customers first and to evidence how they are doing this. The Consumer Duty comprises the following regulatory components: • Principle 12 for firms - A firm must act to deliver good outcomes for retail customers • Three cross cutting rules - Firms must: – Act in good faith toward retail customers – Avoid foreseeable harm to retail customers – Enable and support retail customers to pursue their financial objectives • Four outcomes: – Products and services To ensure all products and services are fit for purpose, designed to meet the needs, characteristics and objectives of a target group of consumers and distributed appropriately – Price and value To ensure that all consumers receive fair value and that there is a reasonable relationship between the price paid for a product / service and the overall benefit a consumer receives from it – Consumer understanding To ensure firms’ communications support and enable consumers to make informed decisions about financial products / services – Consumer support To ensure firms provide a level of support that meets consumers’ needs throughout their relationship with the firm Chapter one - Relationships between advisers and DIMs
7 Relationships between advisers and DIMs To meet the Consumer Duty requirements, all firms need to show how they are putting their clients at the heart of their business, offering products and services that are fit for purpose and which they know represent fair value. The Consumer Duty applies to firms dealing with retail clients. However, it also captures firms where there is no direct relationship between the firm and the underlying retail client, but where the firm is providing products and services into the retail client space. This is particularly relevant where advisers structure their arrangements with DIMs on the ‘agent as client’ basis. The Consumer Duty applies to firms manufacturing products and services (manufacturers) and firms distributing products and services manufactured by a third party (distributors). So, a DIM is deemed to be the manufacturer of the model portfolios that it makes available to advisers. The Consumer Duty applies to all products and services, for example discretionary management services. There are specific requirements for ‘co-manufacturers’ – for example: where an adviser firm and DIM collaborate to ‘manufacture’ a specific product or service. Under the Consumer Duty, ‘a firm would be considered a co-manufacturer where they can determine or materially influence the manufacture of a product or service. This would include a firm that can determine the essential features and main elements of a product or service, including its target market.’* We have published a separate guide for manufacturers, comanufacturers and distributors, which is available from the authors. Each party in a distribution chain – adviser firm, DIM, platform - needs to assess how the Consumer Duty applies to them depending on their role and business model. * FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty. (Para 6.10). Chapter one - Relationships between advisers and DIMs
8 Relationships between advisers and DIMs Regulatory background on structure of the arrangements between adviser firms and DIMs The FCA rules allow for two distinct types of relationship: 1. Agent as client 2. Reliance on others The FCA rules in COBS 2.4.3R (Agent as client) and COBS 2.4.4R (Reliance on other investment firms) cover scenarios where more than one party is involved in the delivery of a service to an investor. The rules allow the relationships between advisers and DIMs to be set up on different bases, provided certain conditions are met. These rules do not cover straightforward referrals of business from advisers to DIMs. In the agent as client scenario (COBS 2.4.3R), if a firm (DIM) is aware that a person (adviser firm) to whom it is providing services is acting as agent for another person (investor) the DIM can treat the adviser firm as its client. In the reliance on others scenario (COBS 2.4.4R), the DIM treats the end investor as its client but can rely on the adviser firm for information and for the recommendation of the investment mandate. We explain these arrangements and their implications in more detail in Chapters 2 and 3. The structure of the arrangements between adviser firms and DIMs affects advisers, DIMs and investors in different ways. There are pros and cons of each option. The key point is that all parties – adviser, DIM, investor (and platform, if used) – understand: • How the arrangements are structured • Their respective responsibilities • The risks / implications of the structure for each party and ensure that these are communicated clearly to investors The fundamental concern for all parties must be securing the best outcome for investors. A firm must act honestly, fairly and professionally in accordance with the best interests of its client (COBS 2.1.1R, the client’s best interests rule). It must also ensure it meets the four Consumer Duty outcomes. Each party - DIM and adviser - will need to be able to show how they are delivering on these key requirements. The structure of the arrangements between advisers and DIMs is a key consideration for advisers when looking at discretionary management propositions - but it is only one part of the equation. The overriding consideration must be that the discretionary management solution being recommended meets the needs, objectives and risk profile of the adviser’s clients. Chapter one - Relationships between advisers and DIMs
9 Relationships between advisers and DIMs It is important to note that the proposition being provided by the DIM can affect how the arrangements are structured. For example: a bespoke discretionary management service provided to sophisticated, high net worth investors will typically be structured on the reliance on others basis; whereas an MPS solution provided via a third-party platform will generally be structured on the agent as client basis. What is crucial is that advisers understand the solution they are recommending, how the arrangements are structured and the impact this has for them and their clients. Advisers perform a central role in setting up these arrangements and have clear obligations to their clients. They need to ensure that the arrangements are clearly understood, documented and articulated to their clients. The Consumer Duty does not change the essence of how arrangements between adviser firms and discretionary managers are structured. However, firms acting under the ‘agent as client’ rules must consider if there are retail customers at the end of the distribution chain and if they can determine or materially influence outcomes for them. Where this is the case, firms must comply with the Duty. For example, when developing a target market, ensuring products or services are designed to meet their needs and objectives, or assessing value for a product or service, a firm needs to consider the end retail customers in the distribution chain, even if it does not have a direct customer relationship with them. This means that discretionary managers acting on the agent as client basis will need to take into account that the end users of their proposition are retail clients.* Each party to the arrangement must ensure they understand each other’s roles and responsibilities so that both parties meet their own and their collective Consumer Duty obligations. *FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty (Para 2.18) Chapter one - Relationships between advisers and DIMs
10 Relationships between advisers and DIMs Selecting the right investment solution Before looking at the detail of the structure of the arrangements with DIMs, advisers first need to look at their client bank (target market) and investment proposition, and consider whether a discretionary management solution is appropriate for their clients in the first place. A firm’s investment proposition – which may or may not include using a discretionary management service - underpins how the firm and its advisers deal with clients, so it is important that the investment proposition is thought through clearly, properly documented, and subject to a robust governance process. Adviser firms with a diverse range of clients will need to consider segmenting their client bank and potentially offering a range of solutions to meet the needs of the different segments (target market). It is unlikely that one size will fit all. Discretionary investment management propositions DIMs offer a wide range of solutions and can work with adviser firms in many different ways. It is up to the adviser firm to select which solution works best for them and their clients. This includes the structure of the arrangements where the implications for both the adviser firm and their investors need to be considered. The main types of service are: • Discretionary investment management - Bespoke • Discretionary investment management - Model Portfolio Service (MPS) Some DIMs also offer white-labelled or co-branded services. Bespoke services With a bespoke service, the DIM tailors the discretionary management service to the specific requirements of an individual investor. This is likely to be used where the client has very specific investment requirements or wishes to have the ability for direct contact with the investment manager. Bespoke arrangements can be structured in different ways, such as a referral by the adviser firm to the DIM or on the ‘reliance on others’ basis with the DIM working in conjunction with the adviser under a tripartite arrangement. In both set-ups, there is a direct contractual relationship between the DIM and the underlying investor. Chapter one - Relationships between advisers and DIMs
11 Relationships between advisers and DIMs Model Portfolio Service (MPS) With an MPS, the DIM produces a range of portfolios, managed on a discretionary basis, designed to match different levels of risk and objectives. The adviser firm selects the model that best matches their client’s level of risk and objectives and is responsible for ensuring the model portfolio recommended or selected is suitable for the investor. An MPS can be provided either: • ‘On platform’ or • ‘Direct’ MPS on platform MPS are provided ‘on platform’ where the DIM partners with selected third-party platform providers and provides access to their MPS via these external platforms. The platform holds the cash/assets underlying the MPS and manages related administration, for example valuations. Having agreed with a client to use a particular platform, the adviser then recommends the DIM/model portfolio that meets the risk profile and objectives of that client. These arrangements are typically structured on the agent as client basis. MPS direct In ‘MPS direct’ scenarios, the DIM offers its MPS directly to advisers and their clients without the involvement of a third-party platform. The DIM is responsible for safeguarding MPS cash/assets and for MPS administration. In some cases, this administration is handled by a DIM’s own in-house platform. The adviser recommends or selects the model portfolio that best meets the client’s risk profile and objectives. With ‘MPS on platform’ and ‘MPS direct’, the platform (if used), the DIM and the MPS solution chosen all need to meet the needs and objectives of the adviser firm’s clients. The nature of the solution – bespoke, MPS on platform, MPS direct etc. will often dictate how the arrangements between the adviser firm and DIM are structured. For example, it would be difficult for a bespoke discretionary management service to be structured on the agent as client basis if the underlying investor wants a direct relationship with the DIM. Conversely, it is difficult for ‘MPS on platform’ to be set up on the reliance on others basis if the DIM does not even know the identity of the underlying investor. ‘MPS direct’ may be able to be structured on both bases – agent as client and reliance on others. Chapter one - Relationships between advisers and DIMs
12 Relationships between advisers and DIMs White-labelled and co-branded propositions Some DIMs also offer white-labelled and co-branded solutions. These do not change the fundamental nature of the services provided but do impact upon how they are presented to clients. An adviser firm using a white-labelled or co-branded solution may well be considered a ‘co-manufacturer’. The FCA have cited ‘white-labelling’ as an indicator a comanufacturing arrangement might exist. With a white-labelled proposition the DIM typically works with the adviser firm to produce a set of model portfolios, managed by the DIM, to reflect the specific objectives and characteristics of the adviser firm’s clients. These portfolios are then ‘white-labelled’ as the adviser’s own models. With a co-branded solution, the model portfolios managed by the DIM are co-branded with the logo of the DIM and adviser firm. White-labelled and co-branded propositions bring with them a different set of regulatory obligations, which are not explored in any detail in this paper. Briefly, an adviser firm must not hold itself out as actually ‘running the money’ as it does not have the necessary discretionary permissions to do so. ‘Running the money’ is the role of the DIM. Any marketing material put together for the end investor must make very clear the respective responsibilities of the adviser firm and DIM. Similarly, charging structures need to be fair and disclosed clearly. Very careful consideration needs to be given to the regulatory implications when setting up white-labelled or co-branded arrangements. Adviser firms will need to consider whether they are ‘co-manufacturers’ and any Consumer Duty obligations that flow from that. See separate guide to co-manufacturing arrangements. Platforms Increasingly, advisers’ use of DIMs’ MPS involves the participation of a platform, usually a third-party platform but sometimes a platform operated by the DIM itself. Where platforms are involved, they provide the administrative infrastructure by which the solution is provided to the underlying investor, i.e. custody, trading/settlement and reporting functions. The platform can play a key role in delivering the proposition as well as providing useful portfolio tools for the adviser and indeed, for underlying investors. The contractual arrangements between the adviser firm and DIM need to consider the role that will be played by the platform and the regulatory responsibilities it will assume, for example for MiFID reporting and best execution. As both manufacturers of their own platform services and distributors of third party products/services, platforms need to consider their own Consumer Duty obligations. Chapter one - Relationships between advisers and DIMs
13 Relationships between advisers and DIMs Research and due diligence The structure of the arrangements between an adviser firm and DIM should form part of the adviser firm’s research and due diligence process. An adviser firm’s research and due diligence process needs to include a thorough assessment of the DIM’s investment proposition and proposed investment mandate as well as considering other factors such as financial and operational resilience. When acting purely for retail investors, the adviser firm will need to satisfy itself that the investment mandates the DIM is running are suitable for retail investors - for example that they only include funds / financial instruments suitable for retail investors. Under the Consumer Duty, DIMs need to consider the retail customers who use the service they provide even if those customers are not direct clients of the DIM. However, this ‘look through’ process will be undertaken at a target market level (i.e. is the MPS designed in such a way as to deliver good outcomes for the retail clients in its target market in general?) rather than at the level of individual underlying clients. Some DIMs may decide to use financial instruments that are targeted at professional investors rather than retail clients, but with the proviso that the overall portfolio continues to be suitable for a retail investor. It is important in this scenario adviser firms assess whether such an approach meets the requirements of the underlying investors and provides appropriate outcomes for investors. With an MPS, it is the responsibility of the DIM to document a clear target market for each portfolio it is running and explain the investment proposition and mandate clearly to adviser firms to allow them to undertake their due diligence. This disclosure should include clear information on what type of funds / instruments the investment proposition could contain. Where the investment proposition includes funds / instruments not targeted at retail investors, this should be made very clear. Chapter one - Relationships between advisers and DIMs
14 Relationships between advisers and DIMs Professional Indemnity (PI) Insurance Adviser firms need to ensure that their PI insurance covers them for their business model and any activities they undertake. This would include using a discretionary management proposition which may be a change to the adviser firm’s existing business model. There has been some concern that PI insurers are reluctant to insure adviser firms acting on the agent as client basis. Feedback from the PI market is that insurers insure risk and will make a judgement of that risk based on the information provided to them. What’s important is that advisers are able to articulate to PI insurers how arrangements are structured and what their roles and responsibilities are. Applying for or renewing PI insurance is one of the most important tasks an adviser firm does and thorough preparation is required. The key points of interest for insurers when assessing arrangements with DIMs are whether: • The respective roles and responsibilities of the adviser firm and DIM are clearly defined and documented • The arrangements have been clearly disclosed to the investor • The investor understands who is doing what and the implications of the arrangements for them • The investor has given their informed and explicit consent to the arrangements • Relevant due diligence has been carried out to select an appropriate service • There is a robust governance and monitoring programme in place These considerations apply in relation to both the agent as client and reliance on others scenarios. Chapter one - Relationships between advisers and DIMs Some IFA PI Insurers are keen to know about the relationship a firm has with any DIM that they work with and whether it is on an Agent as client or an Agent of client (reliance on others) basis. They want to know that the obligations between the adviser firm and DIM are clearly articulated, particularly around suitability and the selection of the underlying financial instruments for the discretionary mandate . They are keen for firms to confirm that they regularly review their Terms of Business with the DIM and are aware of all their duties under the agreement and this should be confirmed during the renewal process. This can be especially relevant where a firm has a number of advisers possibly dealing with more than one DIM who may each have different requirements under their Terms of Business. It is therefore vital that there is a system in place to manage this to ensure that none of their responsibilities are overlooked and potentially leading to a claim against the firm. Julian Brincat, Director, Protean Risk
15 Relationships between advisers and DIMs Product Governance (PROD) Advisers and DIMs have obligations under the Product Governance (PROD) rules and those obligations continue. Firms complying with the PROD rules are likely to meet the requirements of the Products and Services outcome under the Consumer Duty as the requirements are broadly similar. The key requirements under both regimes – PROD and Consumer Duty are as follows: • Advisers must ensure they understand each product or service they are recommending and provide adequate training to relevant staff accordingly. They must also ensure that the product / service is sold only to the identified target market. The launch of a new product or service, which would include the use of a DIM, should be signed off formally at Senior Management level. An adviser firm’s product governance assessment should include how relationships are structured. • DIMs need to understand their distribution channel. They should assess and disclose the target market, and value assessment for their service propositions and make available to advisers, information about their product governance, target market and appropriate distribution channels for their products and services. • Appropriate agreements setting out clearly how the arrangements are structured, and who is responsible for what, also need to be in place. Chapter one - Relationships between advisers and DIMs
162 Structure of arrangements Agent as client Chapter two
17 Structure of arrangements - Agent as client Structure of arrangements Under the ‘agent as client’ rule (COBS 2.4.3R), the regulatory system allows a DIM to treat the adviser firm as its client, rather than the underlying investor, so long as the DIM is aware that the adviser is acting as agent. The agent as client arrangement is often used in platform-intermediated solutions where the DIM has no knowledge of the underlying client, such as when the DIM makes their solutions available on third party platforms. Typically, in the agent as client scenario, the DIM will classify the adviser firm as a professional client although some DIMs may give adviser firms the option to be classified as a retail client. Where the DIM gives the adviser firm the option to be classified as a retail client, it is important the adviser firm checks that the DIM has FCA permission to manage investments for retail clients and not just professional clients. This can be done by checking the DIM’s permissions on the FCA register. In the agent as client scenario, there is no direct contractual relationship between the DIM and the underlying investor. However, the investor will, through their agreement with the adviser covering the use of a discretionary investment solution, need to give permission for the DIM’s fee to be deducted from the portfolio. There is an agreement in place between the DIM and the adviser firm as the DIM’s client (the Intermediary Agreement). There is then a separate agreement between the adviser firm and the underlying investor (the Adviser’s Client Agreement) in which the investor gives their express authority and consent to the adviser to act as the investor’s agent. Chapter two - Structure of arrangements - Agent as client Agreement in place between DIM and adviser firm Adviser Discretionary Investment Manager Agreement in place between adviser firm and underlying investor Investor
18 Structure of arrangements - Agent as client Implications for adviser firms For the agent as client scenario to work, the underlying investor needs to provide their specific authority and informed consent to the adviser firm: • Becoming the client of the DIM, and • Acting as the investor’s agent For the investor to provide informed consent to the arrangements, the adviser firm needs to explain clearly to the investor how the arrangements operate and any regulatory implications for the investor. The adviser firm needs to make clear to the client the scope of the agency arrangement (i.e. it relates to the adviser appointing a DIM and facilitating the provision of the DIM’s service to the investor). See over page under ‘Client Agreements’. It is important the adviser firm understands their obligations before recommending that arrangements are structured on the agent as client basis. This should include seeking third party or legal advice on their client agreements, where appropriate. Implications for DIMs While the onus is on the adviser firm to ensure they obtain the authority and informed consent of their clients to structure the arrangements on the agent as client basis, it is good business practice for DIMs (as the provider of the investment solution) to make sure advisers understand what the arrangements mean for them and their clients, rather than relying on standard wording in terms and conditions. This would include reminding adviser firms that they need the express consent of their clients to act on this basis. Chapter two - Structure of arrangements - Agent as client
19 Structure of arrangements - Agent as client Client agreements It is crucial that each of the parties (DIM, adviser firm and investor) understands how the arrangements operate and their respective responsibilities. The basis on which each of the parties is acting must be set out clearly. Generally, this will be set out in the contractual documentation, for example in a Schedule of Services. Agreement between DIM and adviser firm (Intermediary agreement) The agreement between the DIM and adviser firm should confirm clearly the capacity in which each party is acting. It should also cover the following key areas: • Roles and responsibilities Who is providing the advice (adviser) and who is undertaking the investment management activity (DIM). • Suitability Who is responsible for ensuring the advice to invest in the discretionary management solution is suitable (adviser) and who is responsible for ensuring the suitability of decisions to trade for the investment mandate set (DIM). • Vulnerable clients Responsibility for assessing any characteristics of vulnerability. In the agent as client scenario, this obligation is likely to fall on the adviser firm as the DIM may not know the identity of the underlying investor. In setting the target market for its discretionary management service the DIM will set out any groups of investor for whom the proposition may not be appropriate. • Client classification Confirmation of how the DIM is classifying the adviser firm - professional or retail client. • Reporting Who is responsible for ensuring investors are provided with periodic reports and other required information. The agreement will need to reference how the information is provided, for example via a platform. • Communications from DIMs How communications from DIMs will be passed on to investors – such as factsheets / market commentary etc. • Value assessments How and when DIMS will produce value assessments and provide them for advisers to take into account in determining the value of their own services. Chapter two - Structure of arrangements - Agent as client
20 Structure of arrangements - Agent as client Adviser firm agreements with investors (Adviser client agreement) Where arrangements are set up on the agent as client basis, the investor needs to provide their authority and specific consent to the arrangements being set up on this basis. The agreement between the adviser firm and the investor should: • Explain the basis on which the arrangements are being structured, for example that the adviser firm will be acting as agent of the client. • Explain the scope of the agency arrangement (i.e. the adviser is the client’s agent for the purpose of appointing a DIM and facilitating the provision of the DIM’s service). • Explain what ‘agent as client’ means (i.e. that the adviser will be treated as the client of the DIM, that the investor will not be a client of the DIM and the implications of this arrangement for the investor - see template wording at Appendix 3). • Obtain the requisite signed authority and consent from investors. Advisers should obtain a signed Terms of Business which confirms the investor’s explicit consent to the arrangements. Consequences of the adviser firm being classified as a professional client One of the consequences of the adviser firm being treated as the client of the DIM rather than the investor, is that some protections afforded to retail clients under the regulatory system may not apply in the same way as they do when there is a direct contractual relationship in place between the DIM and underlying investor. Furthermore, where the DIM classifies the adviser firm as a professional client, some of the rules applying to retail clients will not apply to the same degree, such as disclosure of risks and disclosure of costs and charges. These implications need to be managed by the adviser firm and explained to investors. Typically, this will be done through the client agreement. An example of how this information can be presented to investors and how the adviser firm can manage any possible loss of protections, is set out at Appendix 3. Chapter two - Structure of arrangements - Agent as client
21 Structure of arrangements - Agent as client Suitability obligations Adviser Under the ‘agent as client’ scenario, it is the responsibility of the adviser firm to ensure that the discretionary management proposition it recommends to investors is suitable. A discretionary management arrangement may not be suitable for all clients – particularly those with limited knowledge and experience or characteristics of vulnerability. This suitability assessment needs to be undertaken at outset and on an ongoing basis (periodic assessment of suitability) where an ongoing service is provided to, and paid for by, the client. The adviser firm will need to explain why/how the discretionary management proposition meets the individual client’s needs and objectives in its suitability letter. Where an ongoing service is provided to, and paid for by, the client, the adviser firm needs to ensure the ongoing suitability of the discretionary management service for its clients. To meet these requirements, the adviser firm should obtain confirmation on a regular basis (minimum annually) that the DIM has conformed to the terms of the investment mandate. This includes seeking confirmation that the investment mandate remains appropriate for its identified target market and underlying retail investors. Discretionary Investment Manager It is the responsibility of the DIM to explain the investment proposition and mandate of its service clearly to adviser firms and to disclose the target market that it has set for it. Once the mandate has been agreed, it is the responsibility of the DIM to run the service in accordance with the mandate agreed and in accordance with the target market. DIMs have their own suitability obligations. The DIM needs to manage the investments in accordance with the mandate. It also needs to ensure that its decisions to trade are suitable and all transactions are consistent with the investment policy / strategy that has been agreed. It is only by managing the investment to the agreed mandate that the DIM can demonstrate that each trade is suitable. Under provisions in COBS 9A.3, a periodic assessment of suitability must be undertaken at least annually and transmitted to the client (i.e. the adviser). Chapter two - Structure of arrangements - Agent as client
22 Structure of arrangements - Agent as client Reporting to investors Adviser With a discretionary management arrangement, investors need to be provided with certain reports including quarterly valuations. Advisers need to ensure that their contractual arrangements with DIMs and platforms set out clearly who is responsible for ensuring this information is provided to investors. This is particularly important under the Consumer Duty ‘Consumer Understanding’ outcome. It is important that both responsibilities for reporting, and timeframes within which the reporting will be carried out, are clear. Investors need to receive accurate and timely information about their investments. Under the agent as client arrangement, information will be provided by the DIM to the adviser, typically via the platform. It is the responsibility of the adviser firm to ensure that the information is provided to the investor, whether that be via a platform or directly from the adviser. Discretionary Investment Manager DIMs need to ensure that they have arrangements in place for communicating the information required for quarterly valuations in a timely manner to adviser firms. In scenarios where the DIM’s services are provided via a third-party platform, the platform will generally produce and provide the required reports. The onus is then on the adviser firm, typically through its arrangements with the platform, to ensure this information is provided to the underlying investors. Chapter two - Structure of arrangements - Agent as client
213 Structure of arrangements Reliance on others Chapter three
24 Structure of arrangements - Reliance on others Structure of arrangements The regulatory system allows a DIM to operate under a formal agreement with the Intermediary and the investor using the ‘Reliance on others’ rule (COBS 2.4.4R). ‘Reliance on others’ is so called because, in providing a service to the underlying client, the DIM can rely on any information about the client provided by the adviser. The DIM can also rely on the suitability of any recommendations in respect of the service that have been provided to the client by the adviser. The aim is proportionate regulation – it avoids one firm having to comply with the same requirements in respect of one client. The tripartite relationship between the adviser, the DIM and the investor generally results in three agreements: 1. Between the DIM and the adviser (Intermediary agreement) 2. Between the adviser and the investor (Adviser client agreement), and 3. Between the DIM and the investor (Discretionary management agreement) Chapter three - Structure of arrangements - Reliance on others DIM Investor Adviser Under this scenario, both the DIM and the adviser have contractual responsibilities towards the underlying investor and both will have an obligation to deliver ‘good outcomes’ to such investors under the Consumer Duty. Depending on the contractual documentation, regulatory obligations to the investor are shared between the adviser firm and the DIM. The investor will normally be classified as a retail client. The adviser firm is responsible for: • The completeness and accuracy of any information about the investor it transmits to the DIM. • The suitability of any advice or recommendations provided to the investor. This would include the recommendation of a DIM and/or of a specific discretionary management service as well as the process of setting the parameters of any investment mandate under which the DIM is required to operate.
25 Structure of arrangements - Reliance on others The DIM is responsible for: • Explaining its investment services / proposition clearly to adviser firms to allow them to undertake their due diligence. This disclosure should include clear information on the target market that the DIM has set for its service, on its investment processes and on the funds / financial instruments it uses. • Managing the client’s portfolio in accordance with the mandate agreed. Whilst DIMs can take advantage of the ‘reliance on others’ rule, it is important to note that both the DIM and adviser firm have their own regulatory obligations to the underlying investor (including suitability). Therefore, it is essential that the interface between the adviser and DIM is as strong as possible to ensure consistency of understanding and that both parties are acting in the best interests of the client. The DIM needs to be comfortable with the quality of the KYC information being provided to it by the adviser. This is to ensure it can show that decisions it makes to trade are suitable. It is prudent, and good business practice, for any FCA authorised firm engaging with third parties to undertake appropriate due diligence on those third parties at outset and on an ongoing basis. Whilst DIMs can use the reliance on others rule, they may wish to satisfy themselves about the quality of the information that is being provided to them. There are two main ways in which this can be done. The DIM can: 1. Put in place sample checks for adviser firms’ clients as cases are submitted to ensure there is sufficient KYC information recorded to allow it to fulfil its own suitability obligations. 2. Undertake a general review of the adviser’s KYC processes to ensure they will be providing sufficient KYC information to allow the DIM to fulfil its obligations. This assessment should be carried out on a regular basis. Chapter three - Structure of arrangements - Reliance on others
26 Structure of arrangements - Reliance on others Client agreements It is crucial that each of the parties – DIM, adviser firm and Investor – understands how the arrangements operate and their respective responsibilities. The basis on which each of the parties is acting must be set out clearly. Generally, this will be set out via a series of agreements as outlined below. Agreement between DIM and adviser firm (Intermediary agreement) The agreement between the DIM and adviser firm should confirm clearly the capacity in which each party is acting. It should also cover the following key areas: • Roles and responsibilities Who is providing the advice (adviser) and who is providing the investment management service (DIM) • Suitability Who is responsible for ensuring the advice to invest in the discretionary management solution and/or the mandate set is suitable (adviser) and who is responsible for ensuring the suitability of decisions to trade for the investment mandate set (DIM) • Vulnerable clients Responsibility for assessing any characteristics of vulnerability • Reporting Who is responsible for ensuring investors are provided with periodic reports and other required information • Relying on KYC information The extent to which the DIM is relying on the KYC information provided by the adviser and/or on the adviser’s original suitability assessment establishing the client’s investment mandate. • Communications from DIMs How the DIM will communicate with the underlying investor taking into account the tripartite nature of the arrangements • Value assessments How and when DIMs will produce value assessments and provide them for advisers to take into account in determining the value of their own services Chapter three - Structure of arrangements - Reliance on others
27 Structure of arrangements - Reliance on others The agreement between the adviser firm and the investor should explain clearly what each party is doing: • Roles and responsibilities Who is providing advice on the use of a discretionary management service and on what the client’s investment mandate should be (adviser) and who is providing the investment management service in accordance with the mandate set (DIM) • Suitability Responsibility for ensuring the advice to invest in the discretionary management solution and the mandate set is suitable (adviser) and responsibility for ensuring that decisions to trade for the investment mandate set are suitable (DIM) • Reporting Who is responsible for ensuring investors are provided with periodic reports and other relevant information Agreement between DIM and investor (discretionary management agreement) The agreement will set out how the DIM will provide its service to the underlying investor and, specifically, how the DIM will manage the client’s portfolio in accordance with the agreed investment mandate. Suitability obligations Adviser It is the responsibility of the adviser firm to ensure that the discretionary management proposition it recommends to investors is suitable. . A discretionary management arrangement may not be suitable for all clients – particularly those with limited knowledge and experience or characteristics of vulnerability. This suitability assessment needs to be undertaken at outset and on an ongoing basis (periodic assessment of suitability) where an ongoing service is provided to, and paid for by, the client. Discretionary Investment Manager DIMs have their own suitability obligations. The DIM needs to manage the investments in accordance with the mandate. It also needs to ensure that its decisions to trade are suitable and all transactions are consistent with the investment policy / strategy that has been agreed. It is only by managing the investment to the agreed mandate that the DIM can demonstrate that each trade is suitable. Chapter three - Structure of arrangements - Reliance on others
28 Structure of arrangements - Reliance on others Reporting to investors Adviser With a discretionary management arrangement, investors need to be provided with certain reports including quarterly valuations. As good practice, advisers should ensure that their contractual arrangements with DIMs set out clearly the DIM’s responsibility for ensuring this information is provided to investors. It is important that both responsibilities for reporting, and timeframes within which the reporting will be carried out, are clear. Investors need to receive accurate and timely information about their investments. Discretionary Investment Manager DIMs need to ensure that it is clear who is providing the requisite information to investors and whether they will do this direct to the investor or through the adviser. It is the DIM’s responsibility to provide this information to investors but good practice should allow the DIM and adviser firm to work together to establish the best way of reporting relevant information to the client. Chapter three - Structure of arrangements - Reliance on others
2193 Chapter three - Structure of arrangements - Reliance on others Conclusion Chapter four
30 Conclusion There are many different discretionary management solutions available for the adviser to select / recommend and there are many different variations in how DIMs deliver their services. It is crucial the selection of a service is driven by the adviser’s and DIM’s understanding of what that service is and how it will be delivered to the client. Adviser firms and DIMs need to work in partnership and focus on the ultimate outcomes to the end investor. There is no right or wrong way of setting up these arrangements. There are pros and cons of all the options outlined in this paper. Adviser firms, DIMs and platforms need to follow the general high-level principles of: • Consumer Duty – Delivering good outcomes for retail consumers and ensuring that the client’s best interests drive decision making • Clear agreement and disclosure between the various parties over roles and responsibilities In the following appendices we provide a checklist of the key points that adviser firms and DIMs may wish to consider when setting up these arrangements. Chapter four - Conclusion
3131 Appendix Checklist - Adviser firm Checklist - DIM Consequences of categorisation as a professional client
32 Appendix one Checklist – Adviser firm This checklist can be used whichever way the arrangements are structured – agent as client or reliance on others. Investment proposition Appendix one - Adviser firm Have you ... Yes / No Comments Assessed the needs of your clients / segmented your client bank / documented your target market? Documented your investment proposition? Assessed whether a discretionary management solution is appropriate for your client bank or whether there might be other more appropriate solutions available? Considered and understood the structure of the arrangements – agent as client vs reliance on others? Documented why / how the discretionary management proposition you have selected, including how it is structured, meets the needs and objectives of your clients / segment of clients? Documented how the proposition meets the four Consumer Duty consumer outcomes: 1. Products and Services 2. Price and value 3. Consumer Understanding 4. Consumer Support Have you ... Yes / No Comments Undertaken and documented appropriate research and due diligence on the DIM and solution you have selected? Checked the target market of the DIM to ensure it meets the requirements of your clients? Selection of DIM and solution
33 Appendix one Appendix one - Adviser firm Agreements Have you ... Yes / No Comments Reviewed all relevant agreements to ensure roles and responsibilities are clear? Reviewed all relevant agreements / communications aimed at consumers to ensure they meet the Consumer Understanding outcome? Agent as client: • Agreement between you and the DIM • Platform agreements • Agreement between you and the underlying investor: – Has the investor provided their authority and clear consent for you to set up the arrangements on an agent as client basis and confirmed they understand the implications – Does the agreement: > Explain clearly how the arrangements are structured? > Explain that you are acting as the investor’s agent? > Explain the DIM is classifying you (adviser firm) as their client and not the investor? > Outline any protections retail investors may lose under the regulatory system (See Appendix 3)? > Obtain the investor’s authority and informed consent (Client signature)? Reliance on others: • Agreement between you and the DIM • Agreement between the DIM and the underlying investor (your client) • Platform agreements • Agreement between you and the investor (your client) Taken appropriate advice, for example legal advice
34 Appendix one Have you ... Yes / No Comments Put in place a monitoring programme to ensure the service being provided by the DIM continues to meet the mandate for your clients and is consistent with your firm meeting its Consumer Duty obligations? Ongoing review and monitoring Appendix one - Adviser firm Have senior management / SMF16 Yes / No Comments Signed off the use of the discretionary management service (including how it is structured) as part of your product governance / Consumer Duty frameworks? Notified your PI Insurer (where relevant) of any changes to your existing business model (You may need to do this if you are entering into an arrangement with a DIM for the first time or changing discretionary management arrangements)? Corporate governance / Product Governance / Consumer Duty sign off
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