The Financial Services Authority (FSA) is encouraging advisory businesses to review their replacement business sales processes.
Replacement business refers to switching a client out of an existing investment into a new solution.
The FSA made the recommendation in final guidance on assessing client suitability for replacement business and when firms offer a centralised investment proposition, such as discretionary investment management.
It follows a thematic review of replacement business, during which the regulator said firms were failing to consider the impact and suitability of additional charges when conducting replacement business, among other failings.
Today, the FSA said firms should consider reviewing their replacement business sales processes to ensure they are acting in their clients' best interests.
They should also consider the controls they have in place to mitigate the risk of unsuitable replacement business recommendations, and the quality of challenge provided by their file review function.
Ensuring clients pay fairly for any replacement business conducted is a key requirement of the FSA's final guidance.
The regulator pointed out the most common reason for unsuitable advice identified in its previous reviews of platforms and pension switching review was unnecessary additional costs.
It said where advice is to switch or transfer an existing investment to a new investment, we expect to see firms conduct a cost comparison between the two solutions.
Firms should consider all the costs associated with the existing investment and the recommended product or portfolio, including initial costs, it said.
Additionally, before a firm recommends replacing an existing investment, it should have due regard to the potential tax implications.
Read the FSA's final guidance HERE.
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