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Linda Smith: Understanding the FCA’s independence definition


The FCA recently published the results of part one of its second stage thematic review which focused on independence following RDR implementation.

On the whole, the findings showed that the majority of firms understood the new requirements around independence and were implementing the rules as the regulator had intended. However, it is clear that a number of firms are concerned that the new guidance raises the bar, despite the rules remaining the same.

So there is still some confusion within the sector around what is and what is not independent.

The majority of the FCA’s papers on the subject refer to a firm’s independence with only limited commentary regarding an adviser’s role, which is probably a contributory factor to the confusion.

There are a number of papers that the regulator has published in an effort to clarify the rules set out in COBS 6.2A. These are FSA’s FG 12/15 and the FCA’s TR 13/5, Factsheet 007 and now this latest publication, TR 14/5. In addition there is a video on the FCA’s website explaining the criteria to comply.

The FCA’s standard for independence is that a personal recommendation is “based on a comprehensive and fair analysis of the relevant market and is unbiased and unrestricted”. The FCA has included examples of good and poor practice in TR 14/5 with scenarios that will make clearer its expectations – but remember, examples are just that, and if you operate differently you may still meet the FCA’s requirements for independence.

Some firms are moving to restricted status as they believe it is too difficult to evidence independence but in practice they may still be operating within the FCA’s independent definition.

The expectation is that every adviser within a firm should be willing and able to advise on all retail investment products. In practice there may be some RIPs that you do not generally use as they would not meet your normal clients’ needs. However, should a client have wider needs and you advise in those other areas you meet one of the criterion towards being independent.

You can work from a panel if, where relevant, you also consider off-panel solutions. Similarly, one platform can provide the solution for the majority of your clients as long as you also consider off-platform investments.

Referrals is an issue that has been widely commented on by the sector. Referrals can be made within a firm but the referring adviser is responsible for the subsequent advice. This often happened for pension transfer business before the implementation of the RDR, when the adviser prepared the research and report and the specialist checked this before it went out to the client. This still applies as long as the adviser takes responsibility for the work.

Remaining independent presents its problems but the FCA’s research shows that many firms are meeting the standards. Others have decided that the independent label is not as important to their clients so have chosen the restricted route. 

Linda Smith is senior technical adviser at the Association of Professional Financial Advisers



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. The pension transfers referred to ion the article aren’t covered by the definition of independence because they aren’t PRIPs.

    Neither is advice on long terms care. Or shares. Or securitised debt. Etc.

    If you create a confused regulatory environment then expect confusion. Presumably that’s a result of ignoring ‘behavioural regulation’…

  2. It’s a shame the independent sector don’t have the same lobbying power as the providers because the damage done to the availability of “independent” advice by the FCA’s mishandling of this is at least equal to that of the recent orphan assets issue that got so many headlines. If they really had customers best interests at heart they would be encouraging the independent sector to grow and thrive not trying to trip them up at every corner.

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