The FSA’s new standards that advisers will need to meet in order to retain the independent label have created some debate and a lot of uncertainty.
The FSA published the final rules in March but it is only now that many advisers are focusing on what they might mean in practice.
The regulator has decreed that to be able to provide independent advice, firms will need to make recommendations based on “a comprehensive and fair analysis of the relevant market and to provide unbiased, unrestricted advice”. That sounds fine to most IFAs – “It is what we do already,” I have heard them say. But the FSA has also applied the requirement to a wider range of products. In addition to packaged products, the definition of retail investment product now extends to include unregulated collective investment schemes, all investments in investment trusts (not just those in investment trust savings schemes), structured investment products and “other investments that offer exposure to underlying financial assets, but in a packaged form, which modifies that exposure compared with a direct holding in the financial asset”. Compliance personnel will have a a field day.
All firms offering themselves as independent will need to demonstrate how they have conducted a comprehensive and fair analysis of the relevant market, selected a product in accordance with the client’s best interests and met the FSA’s unbiased and unrestricted analysis requirement if recommending their own product.
Is being independent about access to the entire market for products or should it be about the independence of the advice?
This brings into question the potential conflict that might arise from IFA ownership by product providers. The FSA provides further guidance on the use of panels and how the independent label applies to platforms, although the latter is, as yet, not so clear.
The thing that struck me most while reading through the FSA rules was the number of times the word product was used.
The independent channel appears firmly aligned to the scope of products and their providers. Access them all and you know you are OK. But is this realistic? Can you genuinely advise from the entire market for retail investment and demonstrate in each case why a certain product and provider was the most suitable? One view I heard recently was that this is impossible.
Has the FSA got it right or has it set the bar too high? Is being independent about access to the entire market for products or should it be about the independence of the advice?
Should the definition of independent be written in a way that requires an adviser to have no contractual ties to any third party that could conflict with the adviser acting in their client’s best interests?
Surely, this is what is most important but probably in the too difficult box, which leaves advisers to decide if the new standards for independence are also too difficult.
Fay Goddard is chief executive of the Personal Finance Society