The Financial Services Authority (FSA) has issued final guidance for firms using centralised investment propositions (CIPs), pointing out the requirements when outsourcing to a discretionary investment manager (DFM).
In its initial guidance consultation on centralised investment propositions (CIP), the regulator had only pointed out two broad structures firms use when working with a third party discretionary investment manager (DFM) to provide a CIP.
The first involved a direct relationship between DFM and client; the second involved the advisory firm having a relationship with a DFM but also holding discretionary permissions themselves.
However, it has now identified a third option in final guidance published today.
This involves the firm arranging for the investment management to be carried out by the discretionary manager but on the basis that the client does not have a direct contractual relationship with the discretionary manager.
Instead the discretionary manager treats the advisory firm as its client. In this scenario, the FSA said it would expect the advisory firm to explain this position clearly to its clients.
In its summary of feedback to the guidance consultation, the FSA accepted it had not initially considered this option.
It said: "In this scenario, the adviser is treated as the client of the discretionary investment manager and does not either need to hold its own permission to manage investments, nor does it require the client to have a direct contractual relationship with the discretionary investment manager."
The FSA has also amended its guidance on the type of due diligence advisers would need to do on CIPs.
Whereas previously it suggested advisers would still have to carry out due diligence on the underlying investments, it has now softened its stance.
Instead, advisers will now have to consider the "provider's approach to undertaking due diligence on the underlying investments".
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