Out-Law Guide 3 min. read
28 Jun 2012, 1:18 pm
The Holy Grail for product providers and platforms is straight-through-processing (STP). STP happens when transactions or other customer instructions are fully automated. It raises legal questions, though, meaning that companies must be sure they have customer permission before putting systems in place.
The Retail Distribution Review (RDR) sets out rules governing what platforms and product providers can and cannot do. The rules are set to come into effect on 31 December 2012, so firms should take a careful look at the regulations that affect the ability to provide STP.
Under RDR a product provider or a platform may facilitate the collection of adviser charges. Under the new RDR rules product providers and platforms must obtain and validate an instruction from customers in relation to any adviser charge for which it provides a facilitation service.
Product providers and platforms must make decisions about when and how they will meet this requirement. Is direct contact with customers required in order to validate instructions? Can a provider rely on a customer instruction provided to it by the adviser? What type of validation is required – a pen and paper 'wet signature' or less formal forms of authentication?
The bottom line is that product providers and platforms must be able to demonstrate that the authorisation for the deduction of an adviser charge has been properly obtained and validated.
This is not likely to be possible unless
Financial Services Authority (FSA) rules and policy statements do not specify how customer’s instructions must be validated or the minimum information which the product provider or platform should obtain. The FSA is clearly aware of the industry’s desire for further clarity on how these rules will work in practice, but has not given any indication that clarity will be forthcoming.
In a policy statement on platforms in August 2011 the FSA said that:
“The basic requirement means that the firm facilitating the payment of the adviser charge must be satisfied that the client has agreed to the payment of the adviser charge and how this should be carried out [our emphasis]. So, for example, a copy of a form signed by the client and provided to the product provider by the adviser may meet the requirement and avoid the need for the firm facilitating payment to contact the client directly, so long as there is no reason to doubt the validity of the information. Our rules do not explicitly state the need for a wet signature, although obviously this is one method a firm can use to validate the instructions from a client.”
The FSA also said that if a customer instruction is obtained via an adviser, the provider must ensure that it has no reason to question the accuracy of the information provided.
Regardless of the form and content of verification, however, product providers and platforms must be able to demonstrate that they have taken appropriate steps to ensure the authorisation to pay the adviser charge has been provided by the end customer. They must also ensure that these processes are fit for purpose and at least meet the FSA’s related systems and controls requirements.
Product providers and platforms must further ensure that they get the timing right in facilitating adviser charges. The new rules insist that they must not pay adviser charges or make advances to advisers in relation to periods of time that are materially different from those to which the client authorisation relates.
There is evidence that product providers and platforms are dealing with the issue of facilitating advisor charges and obtaining instructions from customers. Some providers are adding the instruction to their application forms, others are requiring the customer to sign a separate adviser charge facilitation agreement. Some platform service providers are looking to get an ongoing instruction for all charge payments and then to 'replay' every charge back to the client, giving them a period of time to object (in which case the charge is reversed). Custom and practice will evolve.
With regards to the content of the information to be captured from a customer, it would seem reasonable to assume that providers and platforms will need to understand three things:
Failure to validate the instruction properly could leave a product provider or platform open to a complaint or challenge from a customer that the charge was taken without appropriate authorisation. This may leave the provider or platform liable for any subsequent reduction in value of the customer’s account.