Before the FSA gets round to a final bout of fining every IFA using a wrap or a supermarket in the country maybe we should look at the specifics of Moneywise IFA’s case.

(Dear reader – this is a very long blog by the way (well over a thousand words) so not for the faint hearted or the Twitterati, so you have been warned.)

I always think it’s a good idea to read the full final notices on FSA fines. I think regulated firms should do so too. Here it is:

http://www.fsa.gov.uk/pubs/final/moneywise.pdf

It may be depressing or even a little ghoulish but you get information in a legal format divorced from whatever message the FSA press team and FSA fines team agree is the one they want to send to the market that particular day. Here is my tuppence, or actually more than tuppence on what it means. In my view this fine breaks down into:

1) a UCIS issue.

2) an issue with exotic underlying investments in discretionary portfolios which were not explained properly.

3) a problem with suitability letters and other communications mostly relating to the platform and indeed problems with the justification for the move to a platform at all.

4) A failure to manage a conflict of interest involving the chief executive and his old wrap firm where he is a non-exec, though it was disclosed.

I’ve put a little dividing line between my remarks throughout this blog and the FSA’s. Heaven forbid they got mixed up! But here is the key passage on the UCIS bit.

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FSA notice:

Moneywise did not take reasonable steps in the relevant period to ensure that:

(1)

before including unregulated collective investment schemes (“UCIS”) in its portfolios it understood and considered whether it would be subject to the statutory restriction on the promotion of UCIS to retail customers in section 238 of the Financial Services and Markets Act 2000;

(2)

within its sales process it established and documented each customer’s knowledge and experience of UCIS, so that it could have regard to each customer’s specific information needs when communicating with them about the recommended portfolios and the underlying investments;

(3)

suitability reports and other communications sent to its customers were explicit about the fact that some of the underlying investments included in the portfolios were UCIS which were not in themselves covered by the Financial Ombudsman Service (“FOS”) or the Financial Services Compensation Scheme (“FSCS”);

(4)

it took a structured approach to reviewing advisers’ customer files, giving feedback to advisers, and identifying and correcting deficiencies in fact finds and suitability reports;

Whether or not a customer of the discretionary service wished to understand the nature of the underlying investments in the portfolio, the lack of due diligence meant that Moneywise’s advisers were not prompted to tailor their communications and discussions with customers in a way which met each customer’s information needs and ensured a fully effective discussion of the customers’ attitude to investment risk.

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The killer line for me is that fact that clients may have been in investments not knowing they had no FOS and more particularly FSCS protection, certainly according to the FSA. If that is the case, then my sympathy for the ‘finee’ may be draining away.

However there is a little ‘throwaway’ remark later on in the report which is quite interesting in that it is included in a list of mitigating circumstances.

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FSA notice:

Moneywise obtained legal advice, after the FSA raised concerns with it, about the relevance of the statutory restriction on the promotion of UCIS and it was arguable that in the specific circumstances the restriction did not apply

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Er, that then leaves me in the dark again. So did they or did they not apply the rules? I think this out to be clarified by the regulator as soon as possible. Another way to put the question is to ask if this was a court case would they really have been found guilty in this instance?

Anyway turning to the discretionary service, this seems to be about Brazilian farmed teak. Lovely stuff especially if it means the wild stuff is left alone.

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FSA notice:

Whether or not a customer of the discretionary service wished to understand the nature of the underlying investments in the portfolio, the lack of due diligence meant that Moneywise’s advisers were not prompted to tailor their communications and discussions with customers in a way which met each customer’s information needs and ensured a fully effective discussion of the customers’ attitude to investment risk.

4.12.

By way of example, Customer A was advised to invest in a portfolio aimed at customers with a cautious attitude to investment risk. The portfolio included some investment in an underlying fund which itself invested in Brazilian timber (teak) farming. The suitability report sent to the customer stipulated that the portfolio represented a low risk investment and while it included a brief template summary of the underlying fund, it appeared that the customer had no knowledge or experience of such an investment and that Moneywise had taken no steps to tailor the communication to her specific needs.

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Now to my mind, I’m not sure if investing in farmed Brazilian teak is, these days, a lot riskier than investing in BP, but a lack of adequate explanation may be a problem. However, it should perhaps send alarm bells ringing for IFAs with other discretionary services regardless of the spread of investments. For my part, I would love to see the whole of the offending portfolio/s and get them independently risk rated. It might ring alarm bells for everyone using DFMs.

We now come to the wrap management. First and easiest dealt with is the conflict of interest issue. In the FSA’s view, Moneywise disclosed the conflict of interest but didn’t manage it on an ongoing basis through its compliance team who were not deemed senior enough to manage it anyway. In this though, the FSA also brings up fiduciary duty on the part of the M.D.

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Moneywise did not disclose to customers that Moneywise’s managing director’s statutory duty on the board of the platform provider was to represent the shareholders of the provider, and was potentially misleading its customers by stating that his role was to represent the interests of investors;

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This is a very literal reading of fiduciary duty but it may well be the correct one. To that end, therefore, I am not quite sure whether any firm can have any such dual relationship within financial services, certainly not if the FSA comes calling. Is it credible for a firm’s director to be telling clients: ‘I’m on the board of this other company so rather than representing you, I’m actually representing those shareholders’. I wonder how many arrangements of this nature there may be and if that means more non-exec relationships need broken up or seriously vetted? There are certainly a lot of those relationships within the business to business world but presumably it is only a problem where one is an adviser firm and the other part of the client offering.

Then comes the big frightening platform issue. The issues raised here echo last summer’s platform paper.  I’ve joined two bits of the notice here.

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FSA notice:

Moneywise did not have in place a sufficiently structured approach to reviewing client files and identifying learning and development issues for advisers as the business model evolved, which resulted in the failings in the suitability reports issued by its advisers. Consequently, its suitability reports and fact find documents contained errors and omissions which were not routinely identified and corrected.

Moneywise failed to ensure that its compliance function developed in line with the changes and developments in its business model, in particular, moving to platform-based investments and changing the composition of underlying investments in its range of portfolios. Consequently, Moneywise did not make effective changes and enhancements to its sales process, compliance monitoring and Training and Competence regime to help manage risks relating to due diligence, demonstrating the suitability of its advice, and disclosure of information to its customers.

And:

Moneywise’s systems required each of its advisers to send a suitability report to each customer detailing the recommendation being made by its adviser. In each of these suitability reports, Moneywise failed to:

set out in detail the reasons why Moneywise considered it more suitable for each customer’s investments to be managed on a wrap platform rather than remain in their current location or being placed in alternative investment funds;

tailor its contents to each client and remove parts which were not relevant because of the template-driven nature of the detailed suitability reports it provided;

differentiate between the template descriptions of risks associated with investments according to the levels of each customer’s risk appetite;

clearly state in one place what the actual overall cost to the customer would be, although the fees and charges associated with each underlying investment were disclosed individually; and

break down the amounts or percentages invested in the various funds accurately.

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Messing up the percentages is a bit rubbish of course. Indeed not properly managing the transition in terms of suitability and fact finding leaves a lot to be desired too.

But I have a real concern about the FSA approach. By and large Moneywise is attempting a move – indeed several moves that it is convinced are in the client’s interest – not against it. It is taking, I think, a more uniform approach to providing advice and certainly investment with a series of portfolios, generally regarded as the proper investment approach. It isn’t simply fund spotting or performance chasing. But it may be that because it isn’t making that investment totally bespoke, then it is falling foul of regulation.

I know this firm does seem to have goofed royally in a few places, but would the FSA prefer adviser after adviser within the firm to be creating their own investment strategy for each client regardless if that ends up with a different strategy for each of the 500 or so odd people involved.

I get the feeling from this notice and indeed the other FSA statements this week, that it is on a quest for the perfect adviser and the perfect advice.  It may be searching for the perfect transition. But even if it is possible, which I doubt, fining isn’t going to get anyone there any faster.