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Simon Collin’s ethical case study: Restricting your Independence?

Scenario:

You are an intermediary that has always promoted your services as an ‘independent adviser’ in the past. With RDR now coming up fast you are keen to retain the ‘independent’ badge but are unsure if the revised RDR requirements will enable you to do this, and if so, what changes you may need to make to ensure this can happen.

You have always dealt with a wide range of products across the life, pensions and investments range but understand that the FSA also requires independent firms to advise on investment trusts, exchange traded funds, unregulated collective investment schemes and structured products in order to satisfy the RDR independence rules. Whilst you have touched on most of these areas in the past, your firm does not have a great deal of expertise with those additional products and you are wondering if your ability to deal with these is absolutely necessary post-RDR?

Answer:

The requirements of the FSA rule on independent advice are that the personal recommendation is based on a comprehensive and fair analysis of the relevant market and is unbiased and unrestricted. A firm must not hold itself out as providing independent advice unless this standard is complied with.

A relevant market should ‘comprise all retail investment products (RIPs) that are capable of meeting the investment needs and objectives of a retail client’. For example, if a client indicates that they are only interested in ethical and socially responsible investments, it is clear that there is a range of products that would never be suitable for them, namely non-ethical investments. Their relevant market would exclude non-ethical investments, and an adviser would not need to consider these products when determining independent advice for such a client. So, a relevant market in the context of the standard is defined by a client’s investment needs and objectives and not, for example, by product or service types.

The new standard for independent advice is intended to ensure that such advice is genuinely free from bias towards particular solutions or any restrictions that would limit the range of solutions that firms can recommend to their clients. In providing independent advice, a firm should not be restricted by product provider, and should also be able to objectively consider all types of RIPs that are capable of meeting the investment needs and objectives of a retail client. At all times the process should be ‘client-driven’.

If a firm cannot or will not advise on a particular type of RIP, and that product could potentially meet the investment needs and objectives of its new and existing clients, then its advice will not meet the standard for independence. In other words, the justification for a firm excluding types of RIPs from its range needs to be centred on the client. However, the FSA does not expect a firm to actually recommend all products captured by the broad definition of RIP as a matter of course. It may be possible for a firm to conclude for many clients, early on in the advice process, that certain product types are not going to be suitable, and therefore not consider these product types further for those clients.

Cut article here for the paper version (please delete this afterwards) For paper version include: For the rest of Simon’s answer please go to www.moneymarketing.co.uk/technical

If a firm chooses to use a third party to conduct a fair and comprehensive analysis of its relevant market, the firm is responsible for ensuring the criteria used by the third party are sufficient to meet the requirement. For example, criteria that selected RIP providers on the basis of payment of a fee (or facilitation of adviser charges), whilst excluding those not paying a fee (or providing such facilitation) would not meet the comprehensive and fair analysis requirement.

A firm can use research to distil the product market into a panel and then select a product from the panel when giving independent advice. However, a firm that provides independent advice needs to be able to advise “off-panel” if that would be in the best interests of a particular client. To do this, its advisers should maintain an awareness of what is and is not included in the panel, so they can identify clients for whom an off-panel solution would be suitable. For example, if a client wants ethical investments and a firm does not have a product on its panel that is consistent with this preference, the FSA would expect the firm to review the market for a suitable ethical product. A similar rationale applies to the use of platforms other channels for buying investments – as for panels. A firm can use platforms in providing independent advice, but needs to remain aware of the limitations of its chosen platform and advise ‘off-platform’, or through another platform, where this is best for a client.

In giving independent advice, and where a firm has a number of model portfolios, the firm should not restrict its advice to certain model portfolios, or treat model portfolios as the default solution, regardless of whether these can be tailored for individual clients. Rather, it should be able to recommend other investment solutions and advise on RIPs not held in the model portfolios, if these could meet the investment needs and objectives of its clients. Advisers should maintain a good understanding of the make-up of any model portfolios their firm uses, and the situations in which the model portfolios would – and would not – be a suitable recommendation.

A firm that holds itself out to all clients as providing independent advice should ensure that appropriate systems and controls are in place so that all personal recommendations in relation to RIPs meet the standard, including from inexperienced advisers or advisers who may wish to specialise in a particular area of investment advice (such as pensions). This is also the case if a firm wishes to put in place mechanisms, such as licensing of advisers, to control the quality of advice on certain investment products (such as higher risk products that are rarely going to be suitable for the firm’s clients).

More than one adviser may be involved in developing independent advice for a client. An adviser may, for example, wish to consult an experienced colleague on a particular subject before delivering personal recommendations. Similarly, a number of people could be involved in product research and investment monitoring. It may be possible for a team approach to be adopted. However, if a retail client has contact with a number of advisers within a firm, there would need to be a mechanism in place to ensure that any resulting personal recommendation meets the required standard (for example, a particular adviser has oversight of all personal recommendations given to a particular retail client, to ensure that the standard is met). To reiterate, it is the firm’s responsibility to have appropriate systems and controls to ensure that personal recommendations provided by their advisers meet the required standard.

Widening the ‘independent’ regime to include Structured Capital at Risk Products, Unregulated Collective Investment Schemes and all investment in Investment Trusts (not just those in investment trust saving schemes), etc., has extended the product range that independent advisers are required to consider beyond that of the current ‘packaged product’ regime. However, it is expected that many IFA firms will be able to carry on business much as they do at present. The new rules do not require firms or advisers to explore every single product and every single investment option for every single client on every single occasion. However firms would be well advised to review their current business model and product research remit against the new requirements.

Restricted advice, which is any advice that does not meet the standard for independent advice, will come in many different forms. This will cover a whole range of advice situations, from an adviser who is virtually a ‘whole-of-market’ adviser down to the old-style single provider tied agent. Put simply, anything that does not meet the standard for independence will be deemed to be “restricted”. While a firm needs to describe its service as “restricted advice” it is free to choose the words that are appropriate to describe the nature of its restricted advice service to clients.

Simon Collins is managing director of Resources Compliance

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Comments

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

  1. Help is available

    If you need help with getting your head around the requirements – Association of Professional Compliance Consultant members are listed at the following link – http://www.apcc.org.uk/list_of_member_firms.php

  2. Gillian Cardy @ IFA Centre 14th December 2012 at 4:29 pm

    The current list of retail investment products does include SCARPS, units (without specifying authorised or unauthorised) – the actual changes are the introduction of ump sum investment trusts (instead of just monthly savings investment trusts) and the new “catch-all clause” …
    And the FSA has made clear that ETFs are already within the advice regime and that, as now, good client advice will include all products that might meet their needs including cash / National Savings – and a good adviser will tell their clients about the whole range of things that might help – including debt management / mortgage review / cash management / loans and credit card management … and the consultation is in play to reintroduce the limitation on advising on unregulated collectives …

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