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