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Nothing out of the ordinary

In forming a judgement on the FSA’s proposals for the new professional standards of competence and ethics for IFAs, as set out in the document published in June on delivering the RDR, it is useful to compare those standards with those which the law would imply and impose in any event.

In other words, what real practical difference do the new regulatory requirements make? Do they materially add to the burden on IFAs above what the general law requires anyway and do they provide additional safeguards to clients beyond what the general law already provides?

IFAs advise their clients and act for them when dealing with others, such as product providers. Under the general law, IFAs owe their clients a range of contractual and other duties.

The most important are the duties to advise the client and then to carry out the clients’ instructions. When carrying out those duties, an IFA must act with due skill, care and diligence. Failure to act in that way would amount to negligence. The standard of skill, care and diligence is that of a reasonably competent IFA.

The test of that standard, applicable to all professionals, and not just IFAs, is the test given by Mr Justice McNair in his direction to the jury in a case called Bolam v Friern Hospital Management Committee in 1957.

He said: “Where you get a situation which involves the use of some special skill or competence, then the test as to whether there has been negligence or not is the standard of the ordinary skilled man exercising and professing to have that special skill.

“A man need not possess the highest expert skill; it is well established law that it is sufficient if he exercises the ordinary skill of an ordinary competent man exercising that particular art [a doctor] is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a responsible body of medical men skilled in that particular art. Putting it the other way round, a man is not negligent, if he is acting in accordance with such a practice, merely because there is a body of opinion who would take a contrary view.”

The RDR proposals are that all IFAs should be qualified by examination to a new standard which is to be set. Let us call that examination the new entry qualification. The FSA is proposing that not only should new entrants have to pass the new entry qualification but also that all IFAs currently in business should have to demonstrate that they meet the new entry qualification by passing the examination or by demonstrating in interview that he or she has the required knowledge. In other words, there is to be no “grandfathering”.

In other professions, grandfathering is the rule and not the exception. Is it necessary for the FSA to take the exceptional course of not permitting grandfathering? The answer is no, it is not necessary and grandfathering could reasonably be permitted without compromising the new standards.

As mentioned above, the law requires all professionals to apply that standard of skill, care and diligence that a reasonably competent member of that profession would have applied in the circumstances.

After 2012, when the new regime will be fully operational and all new entrants to the IFA profession will have reached the new entry qualification, a reasonably competent IFA will be one whose standard of skill, care and competence is consistent with the new entry qualification, among other things.

A court trying a case in which the issue was whether or not an IFA had been negligent, would hear expert evidence as to what that standard would mean in the particular circumstances in question.

The IFA who was the defendant in the case would not be judged on whether he had or had not in fact passed the new entry qualification exam. The question would be whether he had acted in a way to be expected of a reasonably competent IFA in the circumstances.

Thus, while the new entry qualification may well be the appropriate test for new entrants to the profession, it does not follow that it is necessary for all currently qualified and authorised IFAs to pass the new exam (or its alternative oral assessment).

Those IFAs would have to accept that they would have to operate at the new level of skill, care and diligence in any event and would be judged accordingly by the FSA and the courts. The law would expect such an IFA to have the required knowledge anyway.

So too IFAs may be reassured to know that the FSA’s proposals for a code of ethics simply reflect the requirements of the general law.

Under the general law, by definition, an IFA must be independent. In other words, the IFA must not have any connections with others in the financial services industry that would influence the advice given to a client. The advice must be objective and the result of the IFA carefully, skilfully and diligently applying his or her knowledge and judgement to the client’s circumstances and wishes. The standard of that advice must be at least to the standard of a reasonably competent IFA.

An IFA acts for his or her client in respect of the transactions carried out on behalf of the client. In other words, the IFA is the agent of the client, who is the principal. The relationship of principal and agent is one of trust and confidence and is an example of what the law calls a fiduciary relationship.

The client is entitled to trust and to have confidence in the IFA. The other side of that coin is that the IFA owes the client a duty of single-minded loyalty.

Lord Justice Millett, in the Court of Appeal in 1998, described the consequences of that duty of loyalty by saying that a fiduciary in the position of an IFA “must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal”.

It comes as no surprise that the draft code of ethics requires an IFA “to act honestly and fairly at all timesand to act in the best interests of each client; to act with integrity; to observe applicable lawand professional conduct standards; to be alert to and manage fairly and effectivelyany relevant conflict of interest; to attain a level of professional competence appropriate to your responsibilities and commit to continued learning to ensure the currency or your knowledge, skills and expertise”.

The final words of the draft code, however, contain an exhortation “to uphold the highest personal and professional standards”.

Whether those words add anything of value is doubtful but it is noteworthy that, in the words of Mr Justice McNair quoted above, the law does not require the “highest expert skill” but only “the ordinary skill of an ordinary competent man exercising that particular art”.

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