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Simon Collins: Doing the right thing on independence

The Scenario: You are the Compliance Oversight “CF10” officer of a busy independent investment intermediary. Three months into the RDR things appear to be going fine but you have decided to conduct a review of where the firm has reached. Advisers have their SPSs and CPD activity is ongoing, so you consider the ‘professionalism’ strand sorted.

The other two main areas, service offering and adviser charging, need a closer look though. At this time you have decided to look at the service you offer to your clients. The firm chose to remain independent and the mantra from a number of your senior colleagues is “Of course we are independent”.

Points to consider:

Widening the independent advice regime to retail investment products has extended the products that need to be considered to include structured capital at risk products, unregulated collective investment schemes, investment trusts (not just those in investment trust saving schemes) plus the catch-all of other ‘equivalent ‘ products. The FSA (at the time of writing but soon to be FCA for the purpose of this article) has already confirmed that ETFs and VCTs are retail investment products and must be considered, although they have also accepted that Ucis are really only applicable to those customers who can be classified as either sophisticated or high net worth customers.

Amongst the many independence matters to check are:

  • You need to show evidence that that you are able to advise on all retail investment products that are capable of meeting the investment needs and objectives of your retail clients. The FSA expects firms providing independent advice to be able to provide advice on all types of retail investment product.

  • If you use a ‘panel’, you should be able to show evidence of the criteria used to select products, the product research you have undertaken and how these are consistent with the independence requirements and the client’s best interests rule.

    • If you have excluded a certain type of retail investment product from your ‘panel’ because, after review, you decide that there is a valid reason consistent with the client’s best interests rule for doing so, you must be able to show evidence of this decision.

    • Although you say that you provide independent advice, you also need to be able to advise off-panel if that would be in the best interests of a particular client.

  • The FSA has said it would question a firm that said it was independent and considered all products but did not have a mechanism for actually advising on a particular product e.g. investment trusts or ETFs and/or did not sell them in practice.

  • If you use a platform, you should be aware that the FSA expects it to be very rare, if possible at all, that a firm could use a single platform for all of the investment business for all of its clients and meet the standard for independent advice.

  • If the firm is stating that it is independent, all advisers in the firm must provide independent advice. If an adviser does not give advice in an area where their clients have needs but outsources the advice then FSA would question whether the adviser can or will advise in this area and, hence, whether the firm is providing independent advice.

  • Your disclosure documentation must be clear about the service that you provide.

However, the FSA does not expect that you will actually recommend all retail investment products as a matter of course.

Also there is no requirement to set out all the products that you have not recommended in the suitability report nor do you have to repeat why certain retail investment products might be excluded in the suitability report itself.

You may conclude that, for many of your clients, certain products are not going to be suitable, and therefore not consider these product types further for those clients.

In summary, to hold itself out as independent, an advisory firm must be ready, willing and able to advise on all retail investment products that could potentially meet the investment needs and objectives of its retail clients.

The FSA would expect a firm’s review process to always start with it considering the whole of the relevant market in an unbiased and unrestricted way.

Given the complexities and potential pitfalls in being able to demonstrate independence, it would be dangerous to accept at face value that the required standards are being achieved.

The FSA has already started its thematic reviews of aspects of RDR compliance and it would be wise to be ahead of the game in this respect.

The review of independence itself needs to be independent of the business as much as possible if it is to achieve the desired level of impartiality and, if your position as CF10 is ‘too close to the business’ and potential conflicts of interest arise you will need to bring this to your board’s attention for deeper consideration.

Simon Collins managing director of RGP Compliance


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

  1. You also need to look at your PI exclusions to see if you are covered to advise in all areas that would be required for ‘Independent Advisers’

  2. @Simon one of the best laid out explanations of why firms CAN remain Independant, they don’t have to go restricted.
    Now all I need to do is finish getting all my processes documented to prove I am Independant still……. unfortunately that doesn’t pay the bills nor provide time to do the study for more CII exams in case they get heavy again and raise the barrier as Martin Bamford seems to think and want them too. I amy kick and scream about compulsion, but it is simply because it is COMPLUSION Stick rather than carrott. Try and beat me with a stick and it will usually get turned round, give me a carrot and like a donkey I might give you a smile in return…..

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