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Peter Hamilton: FCA has misunderstood its own independence rules

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In March, the FCA published the findings of its thematic review, Supervising Retail Investment Advice: Delivering Independent Advice. It was a report on how well firms that describe themselves as providing independent advice comply with the rules on independence and looked at the practicalities of meeting the new RDR requirements on independence. 

The FCA said the report was produced in response to requests from the industry for further clarity. Unfortunately, however, it seems to have misunderstood its own rule and instead of clarity, the report has caused confusion.

The rule in question (6.2A.3, if you’re interested) performs two functions: it sets out what a firm needs to do before it is allowed to describe itself as independent, that is, to make sure that it only gives independent advice. It also defines independent advice.

In several places throughout the review, but particularly in the section on referrals to another adviser, the FCA treats the rule as if it applied not to firms but to individual advisers.  For instance, the review states: “… one adviser in a firm may routinely refer certain clients to another adviser in the firm if they do not have the experience or expertise required. Where advisers are unable or unwilling to advise on certain retail investment products, then these arrangements would not meet the independence rule.”

In a later example, the FCA says: “Every adviser in an independent firm must give advice that meets the independence rule if the firm holds itself as being independent.” The reason given is that clients are entitled to expect the adviser they are dealing with to provide them with an independent service.

Both these examples illustrate how the FCA has misunderstood its own rule in the most elementary way: the rule is explicitly directed at firms but the FCA treats it as applying to individual advisers – that cannot be right.  To satisfy the rule, it is necessary to look not at who does what but at the quality of the advice as a whole as given by the firm to the client. 

The question is, is the firm’s advice independent as defined?  In other words, is it based on a comprehensive and fair analysis of the relevant market and is it unbiased and unrestricted?  That question should be answered from the client’s point of view.  It cannot matter that some, or even all, of the advice was researched and written by individuals who were not themselves able to advise a client on all RIPs as long as the advice is objectively up to the standard of independent advice as defined.  Probably, from a practical point of view, the adviser who presents the advice to the client needs to be sufficiently experienced and expert to know that the advice is properly independent.

So here the FCA is putting an interpretation on the rule which the rule itself does not support.  What does that say about the FCA?  At the very least, it looks as if the FCA lacks a proper system of internal peer review designed to challenge what the project team was proposing to say.  In other words, no one outside the team that wrote the report sat down and thought about what the rule said and whether the report was putting an incorrect interpretation on the rule. There appears to have been no consultation with independent firms.

Imposing a requirement on firms by the side-wind of guidance in a review which the relevant rule does not warrant is a serious matter.  Here the FCA has said, in effect, that every individual adviser in a firm offering independent advice must be able to give advice which measures up to the definition.  That guidance imposes another burden on firms by making it difficult for firms to use experts in particular markets to contribute to the provision of advice.

The FCA needs to take steps to make sure that its work is carried out to professional standards.  It needs to ensure there is an internal review and challenge procedure so it can be sure that each of its several divisions is doing its job according to the rules as they appear in the handbook. An appropriate balance should be achieved between the cost to firms of complying with its rules and the benefit to clients.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Is there a single person employed by the FCA who could be reasonably described as an expert in all areas of regulation and compliance? Anecdotally, there seem to be precious few who are experts even within their particular area of supposed specialisation and now we read of a respected barrister suggesting that the FCA itself isn’t competent even to interpret its own rule book. It’s a farce.

    Perhaps the real agenda is to make the standards for IFA so onerous as to be impossible to meet so that before too long every advisory firm in the land will have to switch to restricted status.

  2. The FCA has assured me that it is not trying to restrict all firms.

    Unfortunately the impact of an ill-thought out policy is yet again coming home to roost.

    isn’t it odd how the regulator has consistently talked about making advisers professional, like solicitors, yet the operational strength of most successful firms is in the very specialisation process that costs us our IFA accreditation?

  3. Julian Stevens 16th June 2014 at 7:08 pm

    A decided oddity of being restricted is that even though the provider to which I’ve chosen to restrict for pension fund accumulation doesn’t offer a stakeholder product, I still have to provide prospective clients with a stakeholder illustration and all the associated discussion thereof for the purposes of comparison. Basically, I’m obliged to say to the client If you’re attracted by the cheapness of a stakeholder pension plan, notwithstanding all its limitations, go elsewhere. Stupid.

  4. The FCA really need to respond to this if for no other reason than demonstrate it can clear up any areas of confusion quickly and effectively. It would expect the same of any regulated firm.

    There has been plenty of comment from the FCA in the past on this subject which was better worded than the guidance referred to in the article. I believe Rory Percival has previously described the expectation that there is one qualified ‘overseeing’ IFA within the firm that looks after each client. This makes sense in the context of knitting together specialists dealing with the client. I suspect the guidance was rather clumsily trying to say this but has ended up getting it wrong.

    Come on FCA, face up to the error and correct it. The whole independence and restricted distinction was poorly executed and virtually impossible for advisers to understand, let alone clients. This further veil of grey needs to be removed post haste.

  5. @ Julian
    The answer to your question is the staff at the FCA are expert at nothing !!!

    Why do you think they (FCA) pull out of their back pocket a section 166 red card or demand a skilled persons report; we (FCA) don’t know but you will have to pay for some-one who does !!!
    And as you say if the industry (we’ve know for quite some time) and barristers have twigged they don’t even understand and misinterpret their own rule book; what hope is there ? couple that with the very high turn over of staff, ipso facto; replacing some knowledge with one who probably has none ?

    Crazy old world really

  6. If the F-pack cant keep the staff which are needed as a statutory body, then the wheel will need to turn and return to self regulation with qualified experienced advisers being asked (like an MP) is to stand for election and be paid to do the job alongside running their own business or advising. Before anyone says anything about that’s not fair on consumers, the FS Consumer panel is made up of place men and women from the London elite

  7. There is a short answer to this piece. The author has either not understood the guidelines or doesn’t understand how they work in practice. An adviser offering whole-of-market advice must be sufficiently competent to do so. How that competence is acquired is another matter. It may be obtained through seeking third party help. What a firm cannot do is allow independent advisers to take responsibility for giving whole-of-market advice when they are not competent to give it. It’s commonsense actually.

  8. @Adam Samuel
    Firstly, you appear to equate whole of market advice with being independent but they are mutually exclusive. Restricted advisers can do the former but may not do it across all PRIPs. Independent advisers only have to do it across PRIPs (a restricted range of packaged products). Do we have to throw in equities, debt securities and other investments to be truly whole of market or independent? Who knows…

    The guidance from the FCA made a lot of sense in most respects. However, consider the following quotes from it:

    “Is each adviser in your firm willing and able to advise on all RIPs?”

    “Where advisers are unable or unwilling to advise on certain RIPs then these arrangements would not meet the independence rule.”

    “…i.e. every adviser within a firm must be willing and able to advise on all RIPs.”

    In the context of the rule referred to in the article these statements are incorrect. It is what is provided to the client by the firm that is the focus of the rule and it makes sense. If that is achieved by a combination of specialists, some of whom don’t give advice in certain areas, then what’s the issue?

    Your dismissal of the author as not understanding the guidelines or how they work in practice seems a little disingenuous to me. At the very best the guidelines were confusing and introduced more uncertainty. At worst, they are wrong. I agree with Peter Hamilton and tend to think they lean towards the latter.

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