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Industry calls for FCA to go further after independence U-turn

The FCA’s U-turn on independent advice and referrals does not go far enough, say industry experts.

Last week the FCA relaxed its interpretation of independence, saying that independent firms can make referrals to specialists within the same firm.

The move follows an industry outcry after the FCA said in a thematic review in March that advisers cannot call themselves independent where they refer cases to specialists, whether internal or external. The only exception is where they are referring cases related to occupational pension transfers and long-term care.

The regulator has now backtracked on its stance on internal referrals but external referrals are still banned for independent firms.

While the change on internal referrals has been welcomed by the industry, experts say the regulator’s position on external referrals is illogical and further clarity is needed.

Confusing guidance

In June, Money Marketing revealed advisers were being told to ignore the FCA’s March guidance on independence.

At the time 4 Pump Court barrister Peter Hamilton said the regulator had interpreted its own rules incorrectly by applying them to individuals and not firms.

Now, he argues last week’s climb down by the regulator “does not go far enough”.

He says: “As long as the firm takes responsibility for a comprehensive and unrestricted review of the market, and takes responsibility for the delivery of appropriate advice for the client, there is no reason why it should not refer to another firm.”

In last week’s note to the industry, the FCA told firms they should use guidance on independence issued by the FSA in 2012 as “the main reference point” for how the independence rules operate in practice.

But Hamilton argues that referring to this guidance is confusing as it specifically recognises the potential for external referrals.

The guidance says: “A firm that provides independent advice can refer clients for pension transfer advice or for advice on long-term care insurance products.

“Such firms can also make internal or external referrals for advice on non-retail investment products. If a firm does not provide any personal recommendations on retail investment products to a client, and refers them to another firm instead (for example, a firm that provides restricted advice), this will not affect its independent status.

“We would, however, expect firms to undertake sufficient due diligence on a service before recommending it to their clients to meet their obligation to treat customers fairly.”

It is understood that the guidance would allow a firm to refer a potential client to another advice firm for capacity reasons or because they did not fit the firm’s client profile. However, it does not allow firms to refer clients because of a lack of specialism.

West Riding Personal Finance Solutions managing director Neil Liversidge says this guidance is “anything but clear”.

He says: “Firms should be able to refer clients externally if they believe another firm can do a better job than them on a given type of business. What could be more independent than to say, ’we could do this but there is a firm down the road that could do it better than us’?

“Last week’s change is a step in the right direction, but the FCA needs to move much closer to the man on the street’s understanding of the word independence.”


But others argue the FCA is unlikely to change its position on external referrals in the near future.

The Institute of Chartered Accountants of England and Wales was influential in lobbying the FCA with concerns that the rules on internal referrals would lead to poorer consumer outcomes.

ICAEW financial planning and advice manager John Gaskell says: “We are delighted that our efforts have resulted in a reprisal and a good outcome for all.

“But our efforts were solely focused on internal referrals, and the issue of external referrals would require a whole new set of thought processes.”

Pinsent Masons senior lawyer Michael Ruck says: “I can see the argument for extending the change to external referrals, but the difficulty is compliance. It is much harder for a firm to demonstrate that an external adviser is being monitored properly.

“Sadly advisers have a bit of a reputation for not being overly compliant, particularly around who is giving advice and who is paying for it. They need to show the regulator they can use internal referrals compliantly before it will look again at external referrals.”

Norton Rose Fulbright partner Peter Snowdon adds: “The FCA has accepted the logic of internal referrals, but it is unlikely to move on external referrals because that would challenge one of the key elements of its definition of independence. The rules state an independent firm must be able to advise on all areas, whether the industry agrees with that definition or not.”

Experts also argue that firms wishing to use an internal referrals approach will need to operate within strict compliance controls.

The FCA says firms can use internal specialists “provided they have appropriate systems and controls in place to ensure that personal recommendations provided by their advisers meet the required standard”.

Ruck says: “Firms using the internal approach will need controls and systems around individual advisers’ expertise, what they are advising on, who checks that advice and who signs off the advice on a holistic basis.

“The danger with a separate approach is that advisers do not take into account other aspects of the advice, which increases the risk of a missale.”

He adds: “It is a shame it has taken this long, and a lot of work from the industry, for the FCA to change its mind.

“Not least because many firms will have paid for compliance consultants to help restructure their business following the guidance in March, and will now have to make major changes again.”

The FCA says IFAs should not routinely refer clients to avoid personal recommendations on specific products.  

Expert view

Peter Hamilton MM blog

The FCA’s announcement is a feeble and inadequate response to the criticism voiced when it first published its thematic review on delivering independent advice in March.

The FCA has failed:

  • To acknowledge that its views on referring to other advisers in the same firm were simply wrong.
  • To set out clearly and simply what it now thinks about referrals, but refers the reader to the FSA’s finalised guidance issued in 2012. This is important because the FSA positively endorsed the idea that there could be referrals internally and that there could be a team approach to the giving of advice. How could the FCA simply have either ignored or overlooked the FSA’s views in March?
  • To say whether it accepted the FSA’s view that, in limited circumstances, there could be referrals to other firms without the referring firm putting its independent status at risk.
  • To spell out clearly what it believes independence really means.

The FSA’s view that there could be an external referral in pension transfer and long-term care cases was based on the fact that advisers needed extra qualifications to advise on such cases, but “all competent retail investment advisers who give independent advice should be able to identify clients for whom [a pension transfer… or] a long-term care… contract should be considered and be in a position to refer these clients on to someone who can provide advice on these products”.

The logical conclusion of that view is that IFA firms should be able to refer on to other firms for specialist advice of any sort, without jeopardising their independent status. The referring firm would need to make clear to the client what was happening and how that advice was to be paid for.

Peter Hamilton is a barrister at 4 Pump Court

How Money Marketing broke the story

  • March: Following the FCA guidance on referrals, Money Marketing reported industry concerns that the rules would not benefit consumers.
  • June: In an article for Money Marketing, 4 Pump Court barrister Peter Hamilton argued the FCA had misunderstood its own rules.
  • June: Money Marketing reported advisers were being urged to ignore the guidance and that the Institute of Chartered Accountants of England and Wales was lobbying the FCA with its concerns.
  • July: Money Marketing reported the FCA had agreed to meet the ICAEW to discuss the issue. Minutes of the FCA’s June board also revealed “continued concern” among the smaller business practitioner panel.

Adviser view


Pete Matthew, managing director, Jacksons Wealth Management

It is good to see the FCA listening to the industry, but the argument about best consumer outcomes applies to external referrals as well as internal. I would like clearer guidelines from the FCA which allow the potential for external referrals where it is in the best interest of the client.


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. It is fair to say that the days where the clients needs come first have long gone. The processes and rulebooks have made it almost impossible to match up the regulations and the client outcome 100% of the time.

    Surely that is counter to the whole point of regulation and consumer protection in the first place………..

  2. What an unfortunate headline. I guess there would be quite a few who would consider Australia too near!

  3. Attending an IFP regional meeting in Bristol a few moths ago, I met with Rory Percival and this issue was raised by the general audience in the Q&A. I will say that he presented himself and his thoughts very well, listened and did clarify and simplify many of the issues raised. I will admit to be being pleasantly surprised and left feeling far more positive about the FCA’s agenda and new found ethos. It doesnt make good copy to say so I admit!

    He was quite categorical that the original definition would not be reviewed again so imagine my [rather pleasant] surprise when I read the updated notes a few days ago that smack of common sense.

    One of Rory’s maii themes for his presentation that night was about professionalism and how we can best implement and demonstrate this in our day to day activities. This after all, he announced, will be the main thrust of any FCA visit / inspection, whether it be announced or unannounced. the FCA are not the FSA and the box ticking, over compliance agenda is nor more he declared. All good stuff…so far.

    He explained that the two fundamental indicators they (the FCA) would look to find evidence of our professionalism was by receiving payment for our intial advice/planning/arrangement services by direct payment and not through a product or provider. the other was to make it obvious that we had placed the Client at the heart of everything we did in dealing with them. This included the way our business is run and the ethos and ethics all of the staff at every stage.

    Surely, [and back to the main point] if referring to another firm ‘down the road’ who you know (having undertaken due dilligence) can deliver a better outcome for the Client, whether its because of a specialism or expertise or even due to a lack of capacaity; this meets his second fundamental indicator.

    More importantly than keeping the regulator happy, this makes for a better Client outcome surely!

  4. What has happened tom plain old common sense and a pragmatic approach to life today .

    Or is it a case those who have the influence and power want to make life complicated rather than making life easy for every one

  5. Rt Hon Sir Arthur Streeb-Greebling 3rd October 2014 at 11:10 am

    Its a bit like the FSA (The Food Standards Authority) enforcing rules against Sainsburys which do not apply to Tesco. Chartered accountants and solicitors are allowed to ‘tie’ (become appointed representatives) to one product provider. Or operate as an ABS ( Alternative Business Structure). The records tell us that there are more dodgy solicitors and accountants who nick their client’s dosh than do IFA’s.

  6. @ Greg Heath

    An interesting point especially as Rory Percival has been quoted recently saying “it gets him annoyed when advisers try to please the regulator rather that the client”

    But I totally agree with you, and would only add we also have to consider FOS which is rather sad in its self, that we have to analyse what we do for any potential complaint over and above our regulatory obligations purely as they are not always consistent both as a collective or individually.

  7. Greg Heath is right, the Regulator can’t see the client wood for the rules trees.

    Let’s stand right back and just consider where we are. The whole subject of independence and what it means has been the subject of much discussion, disagreement, clarification and change much of which has involved the regulator.

    Now ask yourself how independence can be explained in simple terms to a client?

    It can’t. Because RDR independence is categorically NOT common sense or simple. The definition is highly technical – at a very fundamental level a client would need to understand what a ‘packaged retail investment product’, PRIP, was before they could go any further. Want advice on pension transfers, long term care, equities? An independent doesn’t have to provide these. Huh???

    On the other hand, a client who goes to a specialist investment manager who doesn’t provide pension advice but is totally unbiased when it comes to selection of investments (and probably works from a much wider range than an ‘independent’ adviser) has to explain they are ‘restricted. What???

    It’s broke because there are no clients who understand any of this. It is not client centric. If it were a promotion the rule on independence would fail the ‘clear, fair and not misleading’ test. The rules in this respect have singularly failed the very people they are supposed to serve.

  8. I agree with Peter Hamilton & Pete Matthews. The FCA like one adviser firms to have a locum who advises in their absence. How is that any different to an external referral when an adviser doesn’t have capacity to advise and makes an external referral? Interesting as Keydata was deemed an Intermediary by FSCS rather than a provider and where is logic as I have discretionary qualifications, but not authorisation and there are those with G60 or AF3 AND permissions who refer external transfer work due to capacity. Surely as Peter Hamilton says, the thing to do is make it clear who is advising on what, who is responsible for the advice and whose PI covers the advice?

  9. De-coupling Independence from the cost of obtaining advice is ill thought out. Trained Independent advisers are (probably) able to give advice across all products. Some might say it is in the client’s best interests to go elsewhere, not because it can’t be done but because another party that specialises can do it more quickly and cheaply than they can. Proper due diligence takes time and if only a small segment of clients need a specialist product why stock it? My motorbike mechanic can fix my car but tells me it’s cheaper to take the car to a specialist with the right tools. The result is likely to be better too. Of course IFAs have to know about all the client’s needs, but forcing firms to effectively provide sub standard due diligence in areas where they hardly ever practice is likely to cause more rather than less harm.Just a thought.

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