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Breaking up is hard to do

Cazalet Consulting principal Ned Cazalet has warned that the FSA will face high legal hurdles if it tries to carry through its planned separation of sales and advice.

As part of his latest report into the life and pension market, Cazalet says the split is well intentioned but could create consumer confusion and legal disagreements over the use of the word “advice”.

He believes the FSA should have given more focus to issues such as churning and the sustain-ability of business models rather than multi-ties.

The report also criticises the FSA for not doing enough work on what consumers understand and the industry means by “advice” and “sales”, and questions whether the regulator’s plan would be compatible with European law.

Cazalet says: “The question is whether the FSA’s plan to neatly separate advice from sales and assert that if advice is given outside of a whole of market context it is actually not advice, regardless of the plain and ordinary meaning of the word, is capable of being implemented.

“On top of which, there is the possibility raised by the FSA itself, that such proposed action on its part could fall foul of EU legislation.”

In the RDR interim report, the FSA acknowl-edged there would be challenges ahead. It said: “Our starting point for the future landscape should be as simple as possible. We will then determine how close we can and want to get to this, by considering the consequences, in the context of the desired outcomes of the RDR, for consumers and firms and the legal implications.”

Cazalet says the FSA should have further explored the viability of the proposals before compiling the interim report.

But an FSA spokeswoman says this would not have been practical. She says: “I do not know how we would have done that. We made it very clear from day one that the proposals have to come from the industry. The interim report was simply an update on the feedback we have had. We are trying to keep the industry in the loop because this needs to be a collaborative effort.”

Cazalet says there is no clear cut line between advice and sales, as when consumers go to a bank or building society they are not just buying a product, they are also receiving a form of advice.

He says: “To say there is no advice in that is twisting the meaning of the language. The two things are intertwined. Just changing the labels does not take away the fact that part of the sales process involves advice in most cases.”

But Pump Court barrister Peter Hamilton says he does not believe there will be legal barriers to restricting the use of the term advice.

He says the meaning of “adviser” should boil down to who the intermediary is acting for.

He says: “If intermediaries are agents for the client, they owe 100 per cent duty of fidelity and loyalty to the client. The intermediary is bound to give independent financial advice that is objective and best for the client. One can say that advice in the sense of best council can only be give by someone independent.”

He adds that if an intermediary is an agent of a product provider, then anything said to investors can be no more than a recommendation.

Hamilton says the FSA needs to recognise, however, that many advisers specialise in different areas and should not be prohibited from using the term adviser if they do not cover all areas of financial planning.

Reynolds Porter Chamberlain partner Jonathan Davies is also doubtful that legal barriers will exist, adding that the courts would be reluctant to interfere with high-level policymaking.

He says: “The courts would have to establish that the FSA’s policy was one that no reasonable regulator would enforce, was perverse or fell outside of its statutory powers.

“The statutory definition of advice in the Regulated Activities Order is already narrower than most people think. If someone says to a consumer ‘you need a pension’, it does not count as advice.”

British Bankers’ Association director of retail Peter Tyler says the BBA is still exploring the legal and regulatory implications of limiting the use of the term advice as part of its consideration of the RDR interim report.

But he adds: “The issue is complex and we are looking at the potential overall impact of the FSA’s proposals for consumer access to banks’ existing savings and investment services. It is important that whatever the outcome, there should be no ambiguity and that it is clear to the customer exactly what advice – if any – they are getting.”

Association of British Insurers spokesman John French says advice should not be limited to IFAs, adding that the ABI is formulating its response to the interim report.

He says: “There is no need for an arbitrary distinction between who can and cannot provide advice. Advice should be able to be dispensed by as wide a range of qualified people as possible. We can achieve that without having this sales/advice distinction.”

Informed Choice joint managing director Martin Bamford says he is not concerned that legal barriers will prevent the FSA from achieving its outcome.

He says: “If it is the case that the FSA cannot restrict the use of the term advice, I do not think that will be a barrier to creating the separation it is looking to achieve.

“It can still create a distinction between the two without trademarking the term. It would be nice for the sake of consumer clarity but it is not the end of the world if it can’t.”

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