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FSA: Omitting high risk products will not compromise independence

The FSA says independent adviser firms will not need to consider products identified by the FSA as high risk and their independent status will not be affected by choosing not to recommend unregulated collective investment schemes.

The regulator has published its final guidance today on independent and restricted advice under the RDR. It sets out the standards it expect firms to meet that intend to hold themselves out as independent post RDR, the requirements for restricted firms, and the disclosures necessary for firms planning to offer both independent and restricted advice.

Firms offering independent advice will need to ensure advice is “based on a comprehensive and fair analysis of the relevant market” and that is“unbiased and unrestricted”.

The FSA says where it has highlighted high-risk products which should not reach the retail market, as was the case in November when the FSA recommended traded life settlements should not be sold to UK retail investors, independence will not be compromised.

The FSA says: “Where have identified high-risk products and recommended they should not reach retail investors in the UK, a firm would not need to consider them for its clients to meet the standard for independent advice.”

The regulator is planning to consult on new rules relating to the sale of Ucis later this year.

The FSA says: “This will make clear our expectation that Ucis will be suitable for very few retail clients, if any. Our current requirements already limit the categories of investors to whom Ucis can be marketed.

“A firm’s independent status will not be affected if it never  recommends these products because it deems them to be unsuitable for its clients.”

The regulator sets out that meeting the independence standards has to be based on clients’ investment needs and objectives. Exclusions within a firm’s professional indemnity insurance which do not offer cover for certain products are not considered a valid reason for never advising on such products.

But the FSA says it may be possible for a firm to identify that certain retail investment products are not suitable early on in the advice process and therefore rule those products out while still maintaining their independence.

Specialist advisers, such as those focusing on ethical investment, Islamic investment, trusts and charities, and annuities and drawdown products can provide independent advice.

However those firms must not hold themselves out as acting independently in a broader sense. The FSA gives the example of a firm which specialises in ethical investment, which should not brand itself as an IFA across the board but could use wording such as “providing independent advice on ethical products”.

The FSA says as the standard for independent advice applies to personal recommendations of retail investment products, such as units in a collective investment scheme, it expects firms to consider the product market at this level. It points out that a product investing in a number of underlying investments would not necessarily meet the standard of “unbiased and unrestricted advice” even if the underlying investments were wide-ranging.

Where a clients instructs the firm to limit the scope of its advice, such as to a set portion of assets, a firm providing independent advice would only need to consider the products which can meet the client’s stated needs.

Firms providing restricted advice must explain how its service is restricted in writing, and must provide an oral disclosure where the firm speaks to the retail client.

The FSA says: “If a firm can only recommend certain products, then we would not expect to see it giving advice to client to transfer their investments to its restricted product set unless this was in the best interests of the client.”

Panels can be used by firms to distil the product market when giving independent advice. However independent firms need to be able to advise off-panel if that is in the best interests of the clients.


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There are 17 comments at the moment, we would love to hear your opinion too.

  1. Sounds sensible. Now those organisations with their own agenda can calm down and stop suggesting we will all need to give up our independence at the end of the year.

    IFAs will adapt, as they always have done.

  2. Please can we now have a legal definition as to what constitutes a “retail client” or “retail market”. Just want to be absolutely clear so that I sleep safe at night!

  3. Simon Webster 6th June 2012 at 2:05 pm

    We note of course the FSA only stated life settlement plans were unsuitable after the event. As ever IFA’s have to pay.

    If the FSA was a decent regulator they would have banned them before they went on sale…

  4. Phil Billingham 6th June 2012 at 2:06 pm

    Agree with IFA above. Suitability is everything, but we need a well thought through and documented process. Which is what I’ve been saying for years. So, 90% IFA’s to remain Independent then?

  5. Dominic Thomas 6th June 2012 at 2:25 pm

    Sounds like we are heading in the right direction (finally) but I’m really not convinced that the wider public will appreciate the difference between an IFA and another providing independent advice on a small number of products. Still this leaves structured products within the remit of an IFA and of course investment trusts, both of which can offer serious downside traps to anyone that doesn’t really know what they are doing… which will inevitably lead to all of us having a bigger FSCS levy. So why not insist on either dedicated exams and/or specific annual CPD.

  6. As far as risk is concerned, the only difference between money in a life settlement fund and money in RBS et al is that life settlement funds could not count on taxpayers to bail them out.

  7. Phil Billingham 6th June 2012 at 3:45 pm

    Sorry – really don’t do anonymous comments, but the system did not recognise the Blackberry – it’s me at 2.06pm

    Phil Billingham

  8. “The regulator sets out that meeting the independence standards has to be based on clients’ investment needs and objectives. Exclusions within a firm’s professional indemnity insurance which do not offer cover for certain products are not considered a valid reason for never advising on such products….”. Well thats clear then – just because your PI doesnt cover the the risky product does not mean you shouldnt advise a client to have it?”. I presume that the FSA are then going to state that we no longer need to have PI cover to trade then? The rest of it clears up some of the mess however.

  9. Simon Mansell 6th June 2012 at 3:59 pm

    Who defines HIGH RISK. The FSA defined Arch Cru as Cautious, not to mention Key Data and the literature the FSA published over the so called gurantees that attached to final salary pensions!

  10. Gillian Cardy 6th June 2012 at 4:29 pm

    @John Hutton : call or email and I’ll tell you!!

  11. Gillian Cardy 6th June 2012 at 4:33 pm

    @Marty : PI exclusions (or non-compliant excesses) are not a reason for failing to recommend a suitable product to a client (you just need more capital held to cover you if things go pear-shaped).
    If it’s suitable you should recommend it. However, looking at it from the other aide of the coin, I rather suspect that if a product has been excluded from your PI cover, it’s not an “average product” and there will therefore be a wide range of other reasons why it would not be suitable for a retail client (risk, liquidity, access to FOS / FSCS / compensation etc etc)

  12. Point 2.19 says – “which will include products, such as collective investment schemes, that are manufactured outside the UK but are widely available to UK consumers”.
    What on earth does “widely” available mean? The word “available” is pointedly different to the word “used” so presumably useage doesnt come into it.
    If something is “available” then it is available, widely or narrowly being irrelevant. I dont quite get the meaning of “widely” at all. Maybe they meant “easily” or “cost effectively” but then I presume they would have chosen those words if they meant them.
    I suspect it will be a struggle to cost effectively find let alone analyse all worldwide products that are “available” to a UK investor. Im not even sure how youd ever prove that you’d found them all.
    Still, only 6 months to go so Im glad the detail has finally been sorted so brilliantly and intelligently.

  13. Phil Billingham 6th June 2012 at 9:21 pm

    @Simon Mansell

    Just for the record, the FSA did not claim Arch Cru as Cautious, Arch Cru did.

    It was clearly never so.

  14. Larry in London 6th June 2012 at 11:58 pm

    Let’s see now. A year ago, offering advice on a product excluded from a firm’s PI insurance would have been a cardinal sin. Now, it’s expected.

    When will the regulator WAKE UP and realise what nonsense they speak.

    They are taking the IFA community and our clients around in ever decreasing circles.

    How much of our clients’ money has this stroke of genius cost? What will the next one be? That a restricted adviser can be independent? Oh, that was last week. They’ve already done that.

    The idiots.

  15. man on the moon 7th June 2012 at 9:43 am

    @gillian Cardy
    why would any sensible business person advise/recommend an action that their PI cover does not extend to?

    also – the definitions of independent or restricted really don’t seem a million miles from where we are now, or am I missing something?

  16. @Gillian Cardy 4.33. If I hvae to hold more for Cap Ad by recommending a product that is not covered by my PI who do you think is going to pay a fee of that magnatude for the advice? Or are you suggesting that I just dip into the reserves and dump a whole pile more (Never recoverable) cash in. You really need to wise up Gillian.

  17. @ John Hutton

    Suggest you become familiar with the glossery in the FSA handbook. You find most stuff defined in there.

    If you set the date forward to post rdr implementation you’ll find definitions for the words your after, as previously published by the FSA.

    Nothing like staying on top of things I find!


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