Ironically, the Solicitors Regulation Authority is about to determine the future shape of the financial advice market. Many IFAs remain undecided as to whether to opt for restricted status under the FSA’s new classification, having taken the view that the terminology will be unintelligible to consumers, and the deciding factor may well be the question of whether becoming restricted would disqualify them from working with solicitors.
The SRA’s Code of Conduct currently states that if solicitors’ clients require financial advice, they must be referred only to an independent intermediary. This term does not appear in the FSA’s vocabulary, and consequently the Code needs to be changed. However, making the required change is not straightforward, because the FSA has invented a new contrived definition of independence which no longer accords with the commonly accepted meaning of being free from third party influence.
The SRA is set to consult the profession on the issue and, In a further irony, the date on which the SRA board met to discuss the terms of the consultation was 4 July – Independence day, when the Americans were liberated from the influence of the British. Predictably, prominent proponents of the multi-tied sales proposition have taken the opportunity to suggest to the SRA that the easiest solution would be to abandon the commitment to independence and permit solicitors to refer clients to all and sundry financial advisers. This would also accord with the principles-based regulation to which solicitors are now subject, which focuses on objectives rather than hard and fast rules.
The consultation posits three alternative options: to maintain the prohibition against solicitors referring other than to independent financial advisers and to overlook the conflicting terminology; to abandon the prohibition; or to abandon the prohibition but require solicitors to consult with clients before making referrals, so as to ensure that the proposed referral would be in clients’ best interests.
One would like to think that independence in its true sense, being a core principle of the legal profession based on the avoidance of conflicts of interest, would be the default option. However, the Legal Services Act has ushered in a new permissive era for the profession in which the old shibboleths are taking second place to commercial interests, and the regulators seem blind to, or unaware of, the gulf which exists between new model financial advisers and product salespeople.
If the vote does go against independence, it is likely to be the solicitors’ profession which incurs the greatest damage. Solicitors’ reputations will suffer from involvement with the less scrupulous elements in the industry, and the Solicitors’ Compensation Fund will find itself saddled with similar levels of claims to those afflicting the FSCS. It is even possible to envisage product providers buying solicitors’ practices as sales outlets.
For IFAs, the decision as to which way to jump may depend on the vote of solicitors whose understanding of the financial services industry is in most cases limited. The saving grace is that regardless of the way the vote might go, there will always be a major group of financial advisers who are independent in the true sense of the word, regardless of how the FSA might choose to classify them, and whose empathy with solicitors’ professional ethos will give them primacy in the professional connections market.
Ian Muirhead is managing director of Sifa