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.