This article was first featured in Money Marketing in June 2020.
Permissions: Use them or Lose them
We often come across firms that hold certain regulatory permissions, but don’t use them.
The first one that comes to mind is mortgages. Many firms provided advice in this area pre-2008, but once the credit crunch hit, demand reduced dramatically and they naturally pivoted towards other areas.
They retained the permission, however, but don’t provide any advice. Now, if they do get a case, they may prefer to outsource it to a specialist. When asked why they retain the permission, a common answer is that it’s easier than having to re-apply at a later date if their business model changes.
Back in December 2016, the FCA’s Retail Mediation Activities report confirmed that it would be paying particular attention to firms whose regulatory reporting indicated they had not used a permission during the previous 12 months. Subsequently, the regulator wrote to firms to request that they remove their mortgage permissions if they weren’t using them.
More recently, this decision to retain permissions has extended to firms providing occupational pension transfers, but outsourcing the advice. When asked why they are taking this action when they have the permissions and ability to provide it themselves, the answer received is that it presents a significant risk to the business. This isn’t usually because of the potential for future complaints, but rather a fear that whilst they have PI this year, they may not be able to secure cover next year if this particular market continues to contract.
Whilst it is easy to appreciate why firms take this stance, it is worth considering that retaining the permissions, but outsourcing the advice, carries its own risks.
The risks of outsourcing
Firstly, there’s the risk to your clients. You should consider the following questions:
- What due diligence have you completed on the outsourced firm?
- Have you reviewed their advice process and does it appear robust?
- Are they completing Triage, or are you? If they are, how do they do this?
- How do they collate KYC?
- What is their client communication strategy?
- Have you reviewed and considered their conversion rate?
- What percentage of clients are they recommending transfer?
- Will they complete insistent client transactions?
- What experience do they have in this marketplace and how long have they been providing advice?
- What level of PI cover do they have?
- What due diligence have they completed on you as the referee?
At the outset of any outsourced transaction, your roles in the process should be well defined to ensure the transfer advice is completed at arm’s length. Otherwise, you could be considered to be influencing the advice.
Secondly, how are clients being charged for this advice? What remuneration does your firm receive for the referral? Does this create a conflict of interest for the business and how will it be managed?
Finally (and most importantly in my opinion), there is the risk that you may not agree with the advice provided. What are your options in this scenario? You could take it up with the adviser, but he’s unlikely to change his recommendation once he’s put it in writing, so what is the alternative – speaking to the client? You would then step over the threshold into advice, which would mean starting the APTA process again. There are certainly a small minority who may consider saying nothing and would simply allow the advice to proceed unchallenged. After all, it’s not going to come back on them…is it?
Understanding your obligations
The reality is, the vast majority of firms that hold permissions and qualifications understand their fundamental obligation is to ensure any advice is in their client’s best interest. If a scenario like the one I’ve just described happened, they’d likely cease to use the referral firm. However, at the time, it doesn’t prevent the dilemma.
In June last year, the FCA published a set of documents addressing the defined benefit transfer market, setting out new rules and guidance. The changes are considerable and wide ranging, so if you haven’t done so already, firms should read and fully understand their obligations.
Only time will tell if abridged advice (allowing firms to filter out clients for whom transferring out is unlikely to be suitable) may encourage those currently holding permissions, but outsourcing the work, to take up the defined benefit baton once again. Some have already decided the risks in providing this type of service are simply too high and have walked away.
The FCA’s stance on the removal of dormant permissions has not changed. It is collating more data than ever before, through regulatory returns and has openly confirmed it will use it in its approach to supervision. This will likely include communication with firms who hold permissions, but submit returns indicating they are not earning income from them.
Ultimately, this means the decision about whether to retain permissions, if you are not using them, will probably be taken out of your hands.
For more information about regulatory permissions, telephone (0161) 521 8641 or email: [email protected]
The FCA’s full statement on permissions can be found at: FCA reminds firms to regularly review regulatory permissions | FCA