The Financial Services Authority (FSA) has warned that firms must make sure any rebalancing of clients' portfolios is "entirely mechanical" unless they have discretionary permissions.
The issue was raised at the Institute of Financial Planning's (IFP's) Paraplanner Conference in Nottingham yesterday, during a session on centralised investment propositions and "replacement" business.
FSA staff were asked whether firms would have any issues with model portfolios which have automated rebalancing features.
Rory Percival, a technical specialist at the FSA, said: "If you rebalance and exercise any discretion or any thought process, and you rebalance without the customer's consent, then you can only do that if you have discretionary permission.
"You can, if you do it carefully, set it up so that it rebalances on a certain date and in a certain way, but the key point is to make that entirely mechanical.
"The agreement set out with the client at the beginning has to set out the time at which it will happen and the method and you have to keep to that religiously.
He added that it was important to make sure there was a set date for any automated rebalancing, pointing out that shifting the date, perhaps due to market conditions, could cause problems.
"If you do that you fall out of your permissions, you're exercising some thought process and you're in danger of making discretionary change."
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