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FCA says independence is a ‘state of mind’

The FCA says “independence is a state of mind” as it reveals it has concerns around a number of firms who are describing themselves as independent when that may not be the case.

The regulator is carrying out a number of thematic reviews into how advisers are implementing the RDR, including charges disclosure, independent and restricted advice, and non-advised and simplified advice sales.

In its latest review published today, the FCA looked at 113 firms, 88 of which described themselves as independent. Of the 88 ‘independent’ firms, the regulator raised concerns about 28. Of the 28, six were found not to be meeting the independence rules, while the FCA had “serious doubts” over whether a further four firms were acting independently. The FCA would not comment on whether any firms had been referred to enforcement as a result.

The FCA says while most advice firms are using the independent labal accurately, there are issues around use of platforms, referrals to other advisers, advisers not being able to consider all retail investment products, and networks failing to ensure that all ARs are meeting the independence requirements. 

Speaking to Money Marketing, FCA technical specialist Rory Percival says: “Independence is a state of mind. It is about keeping an open mind and considering all of the options.

“That is at the root of many of the questions we get from advisers about independence – advisers can go through a filtering process and use panels, model portfolios or platforms, but when sitting with a client advisers need to keep an open mind and give clients the right advice.”

The review includes good and bad practice examples and the regulator has also put together a video on its independence rules. 

FCA head of investment advisers and platforms Clive Gordon says: “We have had feedback from advisers asking us to clarify the rules, and it is important to do so because we do not believe the independence rules are as onerous as some firms think.

“When we have said firms need to do a comprehensive review of the market some advisers thought they had to carry out due diligence on every single product or provider, but that is not the case.

“Once firms have appropriately narrowed down those providers or products that are suitable for their client, it is only those they have to carry out due diligence on.”

Gordon says there is no reason why small advice firms cannot comply with the independence rules, and many good practice examples came from small firms.

Percival hopes the review will clear up any adviser confusion over the rules.

He adds: “The intention is to make sure the industry is clear on our expectations and we will take any additional steps to make sure that happens.”

Good practice

• One small firm developed an investment panel by reviewing the whole market and filtering products down using research tools. The firm considered which products to use at a quarterly investment committee, and then undertook appropriate due diligence on those products to come to its final shortlist.

• One firm used a panel for the majority of its recommendations, which had been constructed by reviewing the whole of the market. The panel contained a wide range of products and providers that had been pre-approved. Advisers also had the ability to recommend ‘off-panel’ solutions, which were subject to pre-sale checks and minimum research and due diligence standards.

Bad practice

• The review found some advisers are referring clients internally to other advisers for certain types of business, and so are not providing advice on all products. FCA technical specialist Rory Percival says: “An adviser might never have advised on a drawdown case because they are always passed off to somebody else. Advisers need to be willing and able to advise on all products.”

• One firm was adopting a single platform and not considering off-platform investments or other platforms.

• Firms can use model portfolios to filter down funds, but the regulator would be concerned if in practice they were restricting themselves to the portfolios.

• One firm had designed a single model portfolio it felt would suit all of its clients as it felt they had similar needs and risk tolerances, and did not consider any other investment solutions. The FCA says the firm had restricted its advice by not considering other options for clients when appropriate.


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There are 16 comments at the moment, we would love to hear your opinion too.

  1. So will the FCA accept that if advisers are confused about what is required to be independent that it reflects poor communication from the regulator?

  2. Derek Bradley ceo Panacea Adviser 20th March 2014 at 8:32 am

    Rory Percival says: “An adviser might never have advised on a drawdown case because they are always passed off to somebody else. Advisers need to be willing and able to advise on all products.”

    I am not sure this fits the perception of financial advice being a profession.

    I would not want an orthopaedic surgeon doing my open heart surgery>

  3. We too have been subject to one of these reviews (disclosure) and all I can say is that based on our experience the results are not to be trusted. Seriously flawed, they fail to allow advisers to explain more fully what they do, why they do it and in what context. Based on limited information provided, we got “censored” for doing something that the FSA specifically said we could do. From what we could see the FCA did not understand how we work, the clients we work with and so it appears that they cannot see the difference between financial planning advice and product advice.
    Worse still, you get “censored” without the basic right to reply first! If they have an issue they should explore the problem more fully.
    To take one example, we were told that our scope of work documents were not presented to the customer early enough. I would like to know how early they want them delivered – they can only be drawn up once we have agreed the scope of work and therefore the cost. And until that point clients are not charged.
    These reviews are flawed and not to be trusted. This is what APFA should be fighting for.

  4. Derek: I would not want a heart surgeon doing anything on me if he had an exhaustive, in-depth, highly expert knowledge about the human heart and coronary surgery techniques, but he’d never passed A-level Biology and the rest of the human body was a complete mystery to him.

  5. @Sascha
    But a heart surgeon would have passed A-level Biology and ‘would be’ a qualified doctor/physician, they would simply have decided to specialise in a particular area. They wouldn’t be totally ignorant of other issues around the human body but the GP who deals with ‘everything’ would refer his patient with a heart problem to the ‘restricted’ doctor. Solicitors do the same with Barristers, in fact every profession does this or something similar. Only in our profession it seems does the specialist get down valued and the generalist get lorded.

    More of an issue for me is the conclusion that you can’t be called Independent unless you appear to have advised in all sorts of other areas – In the Bad Practice section the FCA state ‘An adviser might never have advised on a drawdown case because they are always passed off to somebody else. Advisers need to be willing and able to advise on all products’ – so lets take the simple case of a Pension Transfer and an adviser who isn’t qualified to give such pension transfer advice but is fully qualified to level 4. Willing yes, able no! So that wipes off a few more Independents from the market then. What a bizarre world we live in.

  6. Neil F Liversidge 20th March 2014 at 9:53 am

    Quote ‘FCA technical specialist Rory Percival says: “An adviser might never have advised on a drawdown case because they are always passed off to somebody else. Advisers need to be willing and able to advise on all products.”’ This is nuts. I employ an equity release adviser. She specialises in it as I specialise in investments. In the days of the mortgage boom I employed mortgage advisers. Am I now supposed to do everything from mortgages to hedge funds myself? If so, Rory, do you think I should also shove a brush up my **** and sweep the floor as well?

  7. Derek Bradley ceo Panacea Adviser 20th March 2014 at 10:18 am

    “If the Soviet Union let another political party come into existence, they would still be a one-party state, because everybody would join the other party”. Ronald Reagan

  8. At the risk of sounding really stupid and simple here, if the entire adviser community is confused over this issue, then surely it is the end game that shows the difference that is flawed. We have a situation where 20,000 advisers are confused but yet a few in the regulator seem to think its easy. Let me think about that for a moment….. Maybe, and I am only thinking aloud here, just maybe the FCA need to go admit they have screwed this up big time and go back to basics. It used to be very simple – if you were engaged by the client to act as the client’s adviser then you act independently of everyone in the market place. You did not act for anybody but your client so by definition you were independant. It really could not have been easier. So if we go back to basics here and make it so easy that even the FCA will understand it. Lets just have “independent financial adviser” who acts solely for the client and then just “financial adviser” who acts solely for one or more company’s or providers who can only advise on those providers behalf. It is clear, not misleading, direct and to the point IMHO. Thoughts anyone?

  9. Neil F Liversidge 20th March 2014 at 12:27 pm

    It’s a fair comment Marty and also, why should an adviser have to do everything? If an adviser wants to say “You know what – XYZ IFA can do that kind of work better than me, so go to them” then he should be able to do so. What could be more independent than that? Joe Public would recognise our definition. Only in Canary Wharf is it more complicated.

  10. IMHO, every time Rory Percival opens his mouth people get confused !!

    Perhaps he needs a .com after his name ?

  11. There seem to be some inconsistencies between the latest guidance, previous guidance and the rules.

    Firstly, the rules (COBS 6.2A.3R onwards) only refer to a ‘firm’ providing independent advice. They, and the accompanying guidance, are silent on how this is delivered. There is no mention of advisers at all let alone any requirement for individual advisers to do it all themselves.

    Secondly, guidance on this was issued previously and can be found in section 6.8 of FG 12/15. Quote…
    “More than one adviser may be involved in developing independent advice for a client”
    “It may be possible for a team approach to be adopted. However, if a retail client has contact with a number of advisers within a firm, there would need to be a mechanism in place to ensure that any resulting personal recommendation meets the required standard (for example, a particular adviser has oversight of all personal recommendations given to a particular retail client, to ensure the standard for independent advice is met).”

    Call me an old cynic but based on the above the most recent guidance doesn’t quite hang with the rules and previous guidance.

    Can we also address the situation where an ‘independent’ adviser doesn’t have to give advice on pension transfers, long term care, shares, etc. but a restricted adviser can on a whole of market basis? The reality is that it’s complicated and not client focussed. I challenge anyone to find a client who has any real understanding of what independence means post RDR…

  12. At Grey Area above – great post but I take issue with your last statement of ” ………I challenge anyone to find a client who has any real understanding of what independence means post RDR…”

    I am sorry dear boy but it should read “………. I challenge anyone to find an adviser or regulator who has any real understanding of what independence means post RDR”

    Go restricted – then your problems are over you can giggle about the indy definition (regardless of whose it is) and you can still do a fantastic job for 99.9% of you clients as you have done for many years. The 0.1% of the clients you cant do anything for – you wouldnt have done anything different pre the new world of titles. I’m still getting introductions from accountants and solicitors who were a bit hesitant when I told them I was going restricted until I described my restriction – (SEIS, EIS, VCT, Film Partnerships only) and once they know that….. bob’s your uncle. Heard the story about how that phrase came into being but that’s for a different time.

  13. @ Marty

    Good point though I maintain that this should be about clients and on that it has failed miserably.

    To be fair to Rory I have spoken to him and I think he does understand the issues but is bound by the party line and can’t admit publicly that this aspect could have been done better. The fact is that there are very many advisers who are restricted (because they are investment specialists so don’t advise on pension wrappers) but are very much whole of market, i.e. they are ‘restricted whole of market’. Trying to now outlaw terms that describe accurately the mess we’re in smacks of desperation.

    What really annoys me is that instead of putting it right they then create guidance to patch up the holes in the rules. The impression this generates is that it’s done on the hoof. If all this was so blinking obvious from the start why wasn’t it included in guidance (formal and informal) from day one? Regulatory creep – the process of constantly updating the rules through guidance is insidious, destructive and is a poor way to get people on side and working towards a common purpose… just a thought but I wasn’t that the best interests of the client?

  14. I’d have much more respect for the regulator if they were willing to turn around and say “Look, we got it wrong the first time. We’ll change it.”

    Should they decide to change things listening to the industry in the first place would reduce the chance of them getting it wrong.

  15. @Nick Wardle
    Of course you are right and I’m sure we’d all have more respect for a regulator (government, authority etc) who came out and said we got it wrong and we’re going to change it but generally these types are hard wired not to admit mistakes and be ‘not for turning’, to quote a certain iron lady. Culturally there is a problem anyway with the relationship between a regulator and the regulated. They have the power and authority over the regulated and the regulated are the very problem they have to control. They can couch it in any way they like such as ‘we are working together’, ‘in cooperation’, ‘consultation documents’ and they can have as many PR statements that say they listen, workshops, discussion documents – but at the end of the day we are the enemy, the problem, the very issue that means they have to exist. It would be like the police going to the criminal community and asking them for their recommendations on policing. The regulator clearly knows best and we will just have to accept it. Thank goodness they are so accountable otherwise there could be trouble.

  16. Bad practice

    • The review found some advisers are referring clients internally to other advisers for certain types of business, and so are not providing advice on all products

    How curious…..I can’t think of any other profession that would describe this as bad practice. In most that I know it is in fact a general requirement………

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