NEWCOB: IFAs and pensions follow MiFID suitability

Details of the NEWCOB regime have just been released and reveal – as the industry anticipated – all independent financial adviser firms will essentially be required to follow MiFID’s client suitability requirements, as this would maintain consistency between different types of adviser and products which are considered "out of scope" under MiFID.

It means there is little obvious change to the regulatory requirements advisers giving investment-related advice must meet in relation to suitability, according to the FSA, but the key alteration is likely to be less prescription by the FSA as to the contents of documents or the type of client suitability documents an adviser firm uses.

It also means packaged products such as unit-linked life products and pensions – those packaged products falling under the current COB regime – will be bound by NEWCOB.

Intermediaries falling under ICOB or MCOB however, will not be required to alter their processes at this stage, as the FSA has decided to review these regimes separately.

On page 76 of the 350-page consultation document - CP06/19 Reforming Conduct of Business Regulation - detailing everything the UK retail financial services industry will need to comply with, the FSA states:

“We propose to use the relevant MiFID requirements as the nucleus of the NEWCOB suitability standard for all advice and discretionary portfolio management business currently covered by COB 5. The NEWCOB standard would thus also cover non-MiFID products such as life policies, pensions, and other packaged products, and apply to both MiFID firms and non-MiFID firms covered by NEWCOB (including, for example, IFAs not holding client money that have opted not to be MiFID firms).”

In Chapter 14 of NEWCOB – setting out the rules behind client needs and advising - the FSA notes MiFID contains “analogous provisions” on know your customer and suitability requirements but the consistency between these and the FSA’s existing rules means there is generally good grounds for a straight copyout of MiFID as the NEWCOB rules.

This means independent financial advisers currently bound by the existing COB rules will still be required to explain in writing why the advice they have given is the most suitable to their needs, along with best advice on product recommendations.

But changes are being made to simplify suitability letter requirements, says the FSA, so it is “less prescriptive than now, with firms having discretion as to the document they use and its contents, as long as the outcome is delivered”.

Similarly, the FSA will remove its specific rule stating they must recommend the “most suitable” packaged product from the adviser’s prescribed range, as it argues the obligation to act in the best interest of the client, as well as other requirements on disclosure, inducements, and suitability, etc cover this rule.

It’s also a principle being applied to the wider assessment of how client suitability is documented and obtained as the FSA says:

”It will remain up to the firms whether they use a ‘fact find’ and, if so, its format and detail. We believe that our proposals to retain a less prescriptive ‘suitability report’ requirement for retail clients will help firms concentrate on the objectives of this important communication and allow them to focus on what they produce.”

The FSA says, as a result of changes, consumers are unlikely to see any difference to standards of service but could find documents look different because it is up to the firm to decide how information is displayed, while professional clients will find they are asked for more information to satisfy suitability obligations.

Perhaps more importantly, the FSA also says while MiFID requires a financial adviser to assess a client’s experience and knowledge from “necessary information” as a core consideration of its recommendation,the regulatory body appears to suggest advisers will not have to create a detailed spectrum of data to explain why a profession or education makes advice suitable to a particular type of individual as needs “can be calibrated according to type of customer and the nature and extent of the service provided” through a less prescriptive approach, according to the FSA.

The deadline for responses to the consultation on the MiFID elements is 28th November, while responses on all other aspects of the consultation are requested by 23rd February, 2007.

If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Julie Henderson on 020 7968 4571 or email [email protected].

IFAonline

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