When the FCA published the findings of its thematic review looking at how firms are implementing the RDR it became clear that a few were still struggling with disclosure around independent and restricted. Most have gotten over this hurdle now but another problem is lurking on the other side and tripping some firms up.
The question that needs to be answered is this: Can I refer clients to other advisers and still retain my independent status?
The FSA’s finalised guidance published in June 2012 – Retail Distribution Review: Independent and restricted advice – went some way to answer the basics but many firms remained concerned around the application in practice.
There are two areas where it is acceptable for a firm that does not hold the relevant permission to make referrals and retain independence. These are where a client needs advice on pension transfers or pension opt-outs and where a client needs advice on long-term care insurance contracts.
In most circumstances a referral to a discretionary investment service is also unlikely to affect the independent status of a firm. But where an adviser explicitly or implicitly recommends particular funds offered by a discretionary investment manager the recommendation to use the DIM amounts to a personal recommendation and the relevant rules would apply.
Now let us consider the areas where some firms have been unsure about the effects of a referral.
Of course, a firm positioning itself as independent must meet the standard for independent advice. This does not preclude a firm from choosing not to deal with a consumer so long as this decision is made at an early stage. As an example, if the only service a consumer wants is annuity advice and the firm does not think it is commercially viable to provide that advice, a referral to a third party is acceptable.
In this situation, however, the referring firm should be able to demonstrate that it would provide annuity advice to its existing retail investment clients. There can also be complex cases where a referral can be made further into the process.
So an adviser may be providing drawdown advice but it could later turn out that advice on divorce and pension splitting is also required. Here, more than one adviser can be involved in the process, with the first adviser consulting another with the relevant experience of divorce and pension splitting.
When this happens, a particular adviser must have oversight of all the personal recommendations given to the client to ensure that the standard for independent advice is met.
In short, referrals are acceptable in certain circumstances but cannot be used to simply pass off areas of advice that the firm would rather not deal with. Although the FCA has not quantified the number of referrals it would consider appropriate, the reasons behind the referrals are key and would form
part of their supervision.
Linda Smith is senior technical adviser at the Association of Professional Financial Advisers