10th December 2012

Scottish Widows: Replacement business and centralised investment propositions (CIP)

2012 has been an exceptionally busy year for both advisers and providers in preparing for the new post RDR world.  With all the focus on next year, some may have missed two papers from the FSA, which provide very clear and focussed guidance to advisers.

In April of this year the FSA released the paper, ‘FSA Guidance Consultation: Assessing suitability: Replacement business and centralised investment propositions (CIP)’, which they then followed up in July with a second paper containing their final guidance on the topic. 

The timing of this paper was no coincidence, with many advisers interpreting previous guidance from the regulator around ‘investment choice and consistency’, trying to incorporate some science to the selection of investments within a practice, such that two clients of a similar risk profile and with similar aims and assets would end up in a similar investment solution.  This seems to make perfect sense but the FSA was concerned that some advisers were taking this too far, and that very different clients were being ‘shoe-horned’ into investment solutions without due regard for cost and the appropriateness of that investment choice for that individual client.  The FSA conducted analysis reviewing 181 files from advisers who had adopted a Centralised Investment Proposition (CIP).  The ‘pass rate’ was not high:

• 181 files assessed 
  • quality of advice -  unsuitable (33), unclear (103)
  • quality of disclosure - unsuitable (108)

So with three out of four cases failing the FSA review, it is an area where we are likely to see focus maintained.  Recent research carried out by FT Adviser and published in October found that two thirds of advisers expected to outsource some of their clients into a centralised investment structure.  It also reviewed some of the choices that advisers were selecting.  Most of this report focused on the range of investment types one could select but a key factor that also needs to be considered is cost – the guidance related to both the cost of replacement products and the appropriateness of the investment selection for each client.  A useful way to look at this is that all the issues raised in the Pension Switching review have been brought up again but these rules now apply to all types of business rather than pensions in isolation.

At Scottish Widows we are working with advisers to build segmented investment propositions which fit with the FSA guidance on good practice and provide a framework flexible enough to work with the breadth of many advisers’ client types, and crucially their differing advice/service propositions going forward.

For more information please contact your Scottish Widows Account Manager or visit our dedicated website at www.scottishwidows.co.uk/ra-solutions

RDR