In this column last month, I discussed the legal and regulatory duties and obligations which arise for professional and independent advisers in general and for IFAs in particular.
To recap – advice, in the context of professional advice, means the opinion or counsel of the professional person as to the appropriate course of action for the client, having taken into consideration the relevant facts, the client’s wishes and objectives and other matters, such as the tax consequences, in as dispassionate and objective a way as possible. Independent advice must be unbiased and unrestricted, that is, not limited by any agreement with any other person, such as a product provider.
The first duty of a professional adviser is to carry out the job he or she promised in the agreement entered into with the client. In all that is done for the client, the adviser must act with due skill, care and diligence. Further, the adviser must always be loyal to the client so that the client can have trust and confidence in the adviser. Normally, in meeting the appropriate standard of care, the adviser would comply with all relevant regulatory rules.
All that sounds daunting, but last month (although I used different words) I ended by saying that as long as an IFA acts carefully and diligently, he or she should have nothing to fear from either the law or from the regulator.
Before going on to consider the question of independence further, it is instructive to consider what constitutes a profession.
In 1970, the Monopolies Commission identified seven characteristics, most of which were necessary for an occupation to be a profession. The two most important were:
- Practitioners apply a specialised skill enabling them to offer a specialised service; and
- Practitioners are organised in bodies which, with or without state intervention, are concerned to provide machinery for testing competence and regulating standards of competence and conduct.
If one regarded the FSA as the state for this purpose, both those characteristics are broadly true of IFAs, particularly as a result of the FSA’s rule changes following its retail distribution review. The other five characteristics are also worth summarising:
- The skill has been acquired by intellectual and practical training in a well defined area of study;
- The service calls for a high degree of detachment and integrity on the part of the practitioner in exercising his personal judgement of behalf of his client;
- The service involves direct, personal and fiduciary relations with the client;
- Practitioners collectively have a particular sense of responsibility for maintaining the competence and integrity of the occupation as a whole; and
- Practitioners tend or are required to avoid certain methods of attracting business.
About 100 years ago, the great social reformers Sidney and Beatrice Webb said that a profession “is a vocation founded upon specialised educational training, the purpose of which is to supply disinterested counsel and service to others, for a direct and definite compensation, wholly freed from expectation of other business gain”.
There is scope for argument on some of those points but, in general, they are reflected in how IFAs work today.
Earlier this month, the FSA published its finalised guidance on independent and restricted advice in the context of the RDR.
That guidance is welcome as it provides some further clarity but it has been published much too late, given that we are now only six months from the RDR rules coming into force.
So the question arises – is what I have said consistent with the FSA’s guidance? The answer is, yes. But, of course, the FSA has focused on its own new and updated rules as a result of the RDR.
To understand some of the detail in the FSA’s guidance and its consistency with the general law as I have outlined it, it is necessary to note that the FSA’s guidance is confined to independent advice to retail clients in relation to retail investment products.
A retail client is someone who is not a professional in the financial services market, in other words, a lay member of the public. And a retail investment product includes any one of the following: a life policy, units in a collective investment scheme; a personal pension scheme; an interest in an investment trust savings scheme, and any other packaged investment product which offers exposure to underlying financial assets.
In the FSA’s new rules, the definition of independent advice is as follows: “A personal recommendation to a retail client in relation to a retail investment product where the personal recommendation provided meets the requirements of the rule on independent advice.” See Cobs 6.2A.3R.
That statement on its own is circular – it is saying that independent advice is independent advice!
But the rules go on to say that the rule on independent advice is that for a firm to hold itself out as acting independently, the only personal recommendation it can offer to a client must be:
- “based on a comprehensive and fair analysis of the relevant market”; and
- “unbiased and unrestricted.”
Further, in order to comply with the standard of care required by the ordinary law, when formulating that personal recommendation, the IFA must act with that degree of skill, care and diligence that would be applied by a reasonably competent IFA in the circumstances.
The FSA’s guidance on what constitutes a relevant market is it should comprise all the retail investment products which are capable of meeting the investment needs and objectives of the retail client. So, for example, if the relevant market includes products from abroad which are widely available to UK consumers, the IFA should include them in the necessary analysis of the market.
It is also important to note that the FSA’s guidance in its Handbook specifically says that an IFA should consider relevant financial products, other than retail investment products, which are capable of meeting the investment needs and objectives of a client, such as national savings and investment products and cash deposit Isas. On the other hand, if a client says that he is only interested in ethical and socially responsible investments, the adviser can exclude from the relevant market all non-ethical investments.
Crucially, therefore, the relevant market is defined by the client’s investment needs and objectives and not by product or service types. Further, it may be possible to decide early on in the process of advising a particular client that certain product types are inherently unsuitable and can therefore be disregarded.
It goes without saying that to be independent, an IFA must not be bound by any kind of agreement with a product provider. The independence must be from all kinds of influence which could or might have an impact on the advice to the client. Fundamentally, the client must pay for the advice and usually that will be by an agreed fee.
At the heart of the independence issue is the adviser’s attitude or mindset, and the issue of how to charge for the advice is central to that attitude.
The charging of fees sets the adviser free. He or she truly becomes an independent financial adviser. There is no question of having to sell anything in order to earn a living. The IFA is providing a service for which a fee is charged. It is then possible truly to provide advice which is “disinterested counsel… to others”.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk