The Difference Between FCA-Regulated Financial Planners Who Outsource Wealth Management and CMA-Regulated Financial Planners

Introduction

In the UK, financial planning services can be regulated by different authorities depending on the nature of the advice provided. This article clarifies the distinctions between FCA-regulated financial planners who often outsource wealth management to discretionary fund managers (DFMs) through model portfolio services (MPS), and financial planners regulated by the Competition and Markets Authority (CMA). The key difference lies in the type of regulation and the associated conduct risks.

Regulation and Accountability

FCA-Regulated Financial Planners: FCA-regulated financial planners must comply with stringent standards set by the Financial Conduct Authority (FCA). These standards include the consumer duty, which mandates a focus on client outcomes and fair value. The FCA’s regulation covers:

• Specific investment advice
• Activities under Section 22 of the Financial Services and Markets Act 2000
• Arrangement and execution of investment transactions
• Advice on debt liquidation

CMA-Regulated Financial Planners: Financial planners regulated by the CMA provide generic advice and are governed by general consumer law, including the Consumer Protection from Unfair Trading Regulations 2008 and the Consumer Protection (Amendment) Regulations 2014. The CMA ensures these planners:

• Adhere to high standards of consumer protection
• Do not provide specific investment advice or regulated activities
• Maintain a separation between financial planning and the distribution of financial products

Professional Standards and Accreditation

Both FCA and CMA-regulated financial planners can be members of accredited professional bodies, ensuring adherence to high standards of professionalism. These bodies include:

• CFA Society of the UK
• The Chartered Institute for Securities and Investment (CISI)
• The Chartered Banker Institute
• The Chartered Insurance Institute (CII)
• The London Institute of Banking and Finance Limited

These bodies enforce codes of ethics, verify qualifications, and require continuous professional development (CPD).

Outsourcing Wealth Management to DFMs

FCA-Regulated Advisers: Outsourcing to DFMs via MPS is common among FCA-regulated advisers for several reasons:

• Professional Management: Ensures portfolios are managed professionally, aligned with clients’ risk profiles, and rebalanced as needed.
• Regulatory Compliance: Helps advisers meet compliance requirements, including comprehensive reporting and performance tracking.
• Focus on Client Needs: Allows advisers to focus on financial planning and client relationships.
• Focus on Regulated Investments: Financial planning is given in the course of carrying on, or in preparation for, or prior to, financial intermediation of FCA-regulated investments.

CMA-Regulated Financial Planners: CMA-regulated planners typically provide strategic financial advice without engaging in regulated investment activities. Clients manage their own investments, which they can purchase directly from the market or via intermediaries. Benefits include:

• No Distribution Risk: As planners do not distribute financial products, there is no risk of misselling. Clients control the placement of their funds.
• Transparent Fee Structures: Fees are independent of fund placement, promoting transparency and avoiding conflicts of interest.
• Client Empowerment: Clients are actively involved in managing their investments, supported by generic financial advice and education.
• Holistic Approach: Financial planning is comprehensive, aiming to create a well-rounded financial plan that addresses the client’s overall wealth and well-being.

Conduct Risk

Conduct risk differs significantly between the two types of planners:

• FCA-Regulated Advisers: Higher conduct risk due to direct involvement in investment transactions and fund management.
• CMA-Regulated Planners: Lower conduct risk as there is a clear separation between financial planning and product distribution. This “wall” reduces the potential for conflicts of interest and misselling.

Conclusion

The key distinction between FCA-regulated financial planners and those regulated by the CMA lies in the type of advice and activities each is authorised to provide. FCA-regulated planners offer specific investment advice and manage transactions, which comes with higher conduct risks often with investment service and management outsourced to third parties. CMA-regulated planners, on the other hand, offer strategic, holistic, and generic advice without engaging in regulated investment activities, reducing conduct risks and promoting client empowerment and transparency, where the client outsources investment service and management to third parties.

Your choice of service will depend on your financial capability and whether you prefer empowerment or delegation.

Understanding these differences is crucial for clients seeking financial planning, ensuring they choose the right type of planner for their needs and preferences, and receive professional, ethical, and effective financial guidance.

Q&A: Understanding the Differences Between FCA-Regulated and CMA-Regulated Financial Planners

Q1: What is the primary difference between FCA-regulated and CMA-regulated financial planners?

A1: The primary difference lies in the type of regulation and the nature of advice provided. FCA-regulated financial planners offer specific investment advice and manage transactions, adhering to the Financial Conduct Authority’s (FCA) stringent standards, including the handling of client funds. In contrast, CMA-regulated financial planners provide general financial advice without engaging in regulated investment activities, following general consumer law and the standards set by the Competition and Markets Authority (CMA), and do not handle client funds.

Q2: Why do FCA-regulated financial planners outsource wealth management to discretionary fund managers (DFMs)?

A2: FCA-regulated financial planners outsource wealth management to DFMs to focus more on client relationships and financial planning, rather than the complexities of investment management. This outsourcing helps:

• Ensure professional management of portfolios
• Meet regulatory compliance through comprehensive reporting
• Allocate more time to understanding and meeting client needs

According to research, 71% of FCA-regulated advisers outsource their investment propositions to DFMs using model portfolio services (MPS).

Q3: What are the benefits of using a DFM MPS for FCA-regulated advisers or direct clients?

A3: The benefits of using a DFM MPS include:

• Professional Management: Portfolios are managed by experts, ensuring timely rebalancing and alignment with clients’ risk profiles.
• Regulatory Compliance: DFMs provide detailed reporting and performance tracking, helping advisers comply with FCA regulations and keeping clients well-informed.
• Efficiency: Advisers and planners can focus more on financial planning and client relationships, leading to improved overall client service and outcomes.

Q4: How do CMA-regulated financial planners operate differently from FCA-regulated advisers?

A4: CMA-regulated financial planners provide strategic financial advice without engaging in regulated investment activities. They do not distribute financial products, reducing the risk of misselling. Clients manage their own investments, which they can purchase directly from the market or via intermediaries. This approach offers:

• No Distribution Risk: Planners do not touch client money, eliminating the risk of misselling.
• Transparent Fees: Fees are not dependent on fund placement, promoting transparency and avoiding conflicts of interest.
• Client Empowerment: Clients control their own investments, with guidance from the planner.
• Holistic Approach: Financial planning is comprehensive, aiming to create a well-rounded financial plan that addresses the client’s overall wealth and well-being.

Q5: What standards do CMA-regulated financial planners adhere to?

A5: CMA-regulated financial planners adhere to general consumer law, including the Consumer Protection from Unfair Trading Regulations 2008 and the Consumer Protection (Amendment) Regulations 2014. They must:

• Maintain high standards of consumer protection
• Avoid providing specific investment advice
• Ensure transparency and fairness in their dealings with clients

Q6: Are CMA-regulated financial planners held to professional standards?

A6: Yes, CMA-regulated financial planners can be members of accredited professional bodies, such as the CFA Society of the UK, the Chartered Institute for Securities and Investment (CISI), and the Chartered Insurance Institute (CII). These bodies enforce codes of ethics, verify qualifications, and require continuous professional development (CPD), ensuring high standards of professionalism.

Q7: What is the conduct risk associated with FCA-regulated advisers compared to CMA-regulated planners?

A7: Conduct risk is higher for FCA-regulated advisers because they are directly involved in investment transactions and fund management, which can lead to conflicts of interest and potential misselling. In contrast, CMA-regulated planners face lower conduct risk as they do not engage in product distribution, maintaining a clear separation between financial planning and investment products.

Q8: How can clients decide which type of financial planner is right for them?

A8: Clients should consider their specific needs, preferences, and financial capability. If they seek comprehensive investment management and specific advice, an FCA-regulated adviser might be suitable. Conversely, if they prefer strategic financial guidance without direct investment management, a CMA-regulated financial planner could be the better choice. Additionally, your choice will depend on whether you prefer empowerment or delegation. Understanding these distinctions and associated risks helps clients make informed decisions and receive the most appropriate financial planning.