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Standing up to the FCA: Has the regulator got it wrong on independence?

Advisers are being told to ignore FCA guidance on independence as experts warn the regulator has interpreted its own rules incorrectly.

In a thematic review published in March, the FCA said advisers cannot call themselves independent where they refer to specialists, whether internal or external. The only exception is where advisers are referring cases related to occupational pension transfers and long-term care.

It was the first time referrals – other than for pension transfers and long-term care – had been explicitly mentioned as affecting a firm’s independence and many argued the guidance would prevent advisers from specialising and therefore lead to poorer consumer outcomes.

4 Pump Court barrister Peter Hamilton is urging advisers to ignore the guidance, which he argues is an incorrect interpretation of the FCA’s own rules.

The relevant FCA conduct of business rule states: “A firm must not hold itself out to a retail client as acting independently unless the only personal recommendations in relation to retail investment products it offers to that retail client are: (a) based on a comprehensive and fair analysis of the relevant market; and (b) unbiased and unrestricted.”

Hamilton argues: “The guidance is frankly wrong. The FCA said it was produced in response to requests from the industry for further clarity but unfortunately the FCA seems to have misunderstood its own rule and instead of clarity, the review has caused confusion.

“The FCA has treated the rule as if it applies not to firms but to individual advisers. The test has to be whether the quality of advice given by the firm is independent.”

Hamilton says his advice to firms is to ignore the guidance in the them-atic review and obey the Cobs rules.

He says: “If the FCA asks a firm to prove it is acting independently, it will need an audit trail to prove the advice was based on a comprehensive and fair analysis of the market and is unbiased and unrestricted. If the FCA tries to discipline advisers for this then firms should stand up to the regulator.”

The Institute of Chartered Accountants of England and Wales is lobbying the FCA with similar concerns.

ICAEW financial planning and advice manager John Gaskell says: “This is a problem for a number of our members. The fundamental issue is it is the firm which is responsible for an outcome that meets the independent standard.”

Best possible advice

The FCA’s thematic review states advisers can seek expertise from another adviser but must be in a position to provide and take responsibility for the final advice to the client. Industry experts are concerned that while this presents a possible workaround, in reality it is “clunky”, and prevents firms from directing a client to the person best placed to advise them.

The Phil Billingham Partnership director Phil Billingham says: “Many chartered and accredited firms will have advisers which specialise in certain areas and, while all advisers can advise on all areas, they may choose to refer certain clients to colleagues in order to give the best possible advice. The workaround proposed by the FCA is clunky from a client’s viewpoint.”

Yellowtail Financial Planning managing director Dennis Hall says: “It is absolutely right that independent advisers should specialise in certain areas. You cannot be all things to all people if you want to get the best consumer outcome.”

Informed Choice managing director Martin Bamford says each adviser in his firm can advise on all areas but in practice chooses to specialise. He says: “It comes down to a commercial decision about who is best placed to give advice on a certain area.”

Gaskell argues firms must be allowed to “organise their expertise in a way that achieves the best possible outcomes”.

Unintended consequences

The ICAEW and Apfa both believe the guidance may have unintended consequences for advisers.

Gaskell says: “The natural outcome of this is either independent firms will be able to deal with less complex issues, which is completely contrary to what one would expect from independent firms, or firms will move to become restricted.

“There are concerns this could preclude advisers from being appointed to independent firms – for instance, a paraplanner could not be promoted to an adviser because at that stage in their career they could not be expected to be an expert on all areas.

“It also has implications for continuing professional development and training. If the FCA expects independent advisers to have in-depth knowledge on all areas, then arguably their CPD would need to be much more extensive.”

Apfa director general Chris Hannant says many of the trade body’s members have raised concerns about the implications of the guidance for taking on new advisers.

He says: “A lot of our members are saying if you are a small firm and you take on a trainee member of staff, as soon as that person starts giving a bit of advice on one area the firm is no longer independent.

“The fact we are still having these conversations a year and a half on from the RDR and the industry is still struggling to understand the rules suggests the advice labels independent and restricted have failed a very basic test: to convey to clients what type of service they will receive.”

Standing up to the FCA?

But other regulatory experts have urged caution in taking up Hamilton’s advice to ignore the regulator’s guidance.

DWF Fishburns partner Harriet Quiney says: “Cobs is only a framework in a principles-based system.

“In this sort of system, you need to show good reason for departing from clear guidance from the regulator which can be seen as filling in the detail: the presumption must be the regulator knows what it is doing and its guidance is correct.

“To ignore the FCA’s guidance on the basis you think it is wrong is risky and firms do so at their peril.”

Pinsent Masons senior lawyer Michael Ruck says: “Firms have to bear in mind all the guidance which comes out from the FCA but it is the rules which are overarching. As it stands, the FCA’s position remains unclear but it is going to take a brave firm to ignore the thematic review.”

Gaskell says further clarification from the regulator is needed.

He says: “We have spoken to the regulator to explain our concerns and invited them to attend a seminar on the subject last week, but have had little response.

“The regulator needs to be capable of drafting rules that can accommodate diversity and different ways of working and needs to work with the industry so it is more able to understand how professional firms operate.”

A spokeswoman for the FCA says: “In 2012, we published finalised guidance on the question of independent and restricted advice. Then, as now, we said it was ‘the firm’s responsibility to have appropriate systems and controls to ensure personal recommendations provided by their advisers meet the required standard’.

“This is because firms operate through their employees and agents and must ensure their employees and agents comply with the FCA rules on their behalf. A firm should not hold itself out as providing independent advice for its business as a whole where it offers both independent and restricted advice. This does not stop a firm from having specialists within it or from using those specialists to provide input into the personal recommendations provided to the client.”

The rules on referrals: at a glance  

  • The FCA’s final guidance on independent and restricted advice, published in 2012, says: “A firm that holds itself out as independent should ensure that appropriate systems and controls are in place so that all personal recommendations meet the standard for independent advice, including from inexperienced advisers or advisers who may wish to specialise in a particular area of investment advice.” It adds that more than one adviser may be involved in developing advice for a client, but there needs to be a mechanism in place to ensure any resulting recommendation meets the required standard.
  • The guidance does not make specific mention of referrals except to say independent firms can refer clients for advice on pension transfers and long-term care.
  • The relevant Cobs rule on independence says an independent firm must ensure recommendations are based on a comprehensive and fair analysis of the market, and are unbiased and unrestricted.
  • In a thematic review published in March, the FCA said advisers cannot call themselves independent where they refer to specialists. The review says: “Every adviser within a firm must be willing and able to advise on all retail investment products. However, it is possible for an adviser to seek expertise from another (either internal or external) as long as they are in a position to provide the final advice to the client.”

Adviser views


Philip J Milton & Company managing director Philip Milton: Our firm has always operated on a team basis. I seek guidance from lots of people before delivering a final report to a client, and we do not see clients as belonging solely to one adviser. It is as if the FCA is not aware of how things function in the real world.

Page-Tim-Page Russell-2014-500x320.jpg

Page Russell director Tim Page: The industry is at risk of getting overly technical about this and should have more faith in the principles of the rule. If in doubt, advisers should refer to the Cobs rules and the client’s best interest rule. 

Expert view


In principle, Peter Hamilton’s point is well made. Cobs clearly applies to the firm and the firm carries the liability and the responsibility for any advice given, not individual advisers.

That said, it is important to understand the two different ways advisers may refer to each other internally. The first and most common is where there is a relative specialism. 

So all advisers could give advice on pensions, for example, but if  a particular adviser has more expertise and rightly so then the initial adviser may wish to include their colleague to give better quality service to the client. 

In reality, this is independent advice “plus”, where the minimum for independent advice is not only achieved but surpassed and is an approach likely to be taken by chartered or accredited firms.

The other type of referral is where an adviser simply has no expertise in a certain area and always refers those clients to a colleague. 

The firm itself may be splitting different areas of advice between its advisers. If this is what the regulator is referring to, then I share its concern about the potential for consumer harm.

I suspect the FCA is trying to solve potential problems in the second scenario and failing to think through the client relationship challenges in the first. 

The FCA has said it is possible to consult with another adviser as long as the initial adviser takes responsibility for the advice but that could be clunky from a client’s viewpoint.

Phil Billingham is director at The Phil Billingham Partnership


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. The Hound of the Compliancevilles! 13th June 2014 at 9:00 am

    My understanding was that advice needs to be unbiased and unrestricted – this applies to the firm but then equally to the employees in it. Therefore if you have an adviser within a firm that is calling itself independent who cannont/will not advise on the full range of RIPS (for example he cannont advise on structured products or UCIS because he isnt licensed by the firm to do so ) then he cannont provide independent advice.

    In order to do so the final advice would have to come from an adviser within the firm who can advise on the full range of RIPS. To me this does make sense and it is all very well a solicitor interpreting the letter of the law – but the FCA will often quote the spirit, or its principles, and they are harder to argue against and quite frankly not worth the time and expense arguing.

  2. Well I’m glad that’s cleared that little issue up then.

  3. That’s all well and good, but rather ignores sole practitioners – who by either definition have to toe the line.

    However I do think that some of the application of the rules is a bit silly. If you are level 4 and charge fees and (say) specialise in pensions, but not life assurance – why can’t you be independent. You can always refer to a life expert – (or perm any example you chose).

    It is madness to insist (for example) that a stockbroker is restricted. Who goes to a stockbroker for life cover? By all means make it obligatory (as it is now) for a stockbroker to make it plain in the Terms of Business, that a client must ensure via a suitable independent adviser that they have the necessary life assurance, pension and tax planning or whatever.

    The old definition of Independence seemed to work fairly well, but I agree needed a few tweaks. I have never understood how a Network member could be truly independent and state again what my preferred definition would be in addition to level 4 and fee charging:

    Ability to set your own tariff.
    Free from outside influence. i.e. no outside shareholders or ‘sleeping partners’.
    The unambiguous owner of your own clients.
    Individual responsibility for the advice and the business.

    However it is all very well for the regulator to make these rules, but in effect ignore them themselves.
    Presumably the delineations have been made for the benefit of the public. The FCA has a public website on which members of the public can look up advisers and establish whether they are authorised. Why in heaven’s name therefore doesn’t this site advise the status of the adviser – whether independent or restricted? I have put this question to the regulator on numerous occasions without anything approaching a logical or reasoned answer.

    If anyone at Canary Wharf reads this perhaps they might like to respond? (In private if preferred).

  4. Why does the Regulator not accept that if the entire industry is confused by their definitions we have a major problem. It is not helpful when the Regulator says ….” the final guidance was given and you need to get on with it.” If it is not clear, it is not clear and we cannot get on with it. It is a ridiculous statement to make. If we don’t understand the rule because they are not clear, we don’t understand and therein lies the problem.The Regulator will not admit they have totally c*cked up what used to be such a simple distinction. You either acted for a provider (or several providers) and only sold their products or you acted for the client, with no ties to any provider and sold the product which was suitable from the market. It really could not get much easier than that.
    No smart-arsed comments about “I never sold, I advised” we all sell to clients. The whole world revolves around sales its how everyone makes money (in the private sector obviously)

  5. We are told by one lawyer, ignore what the FCA guidance says, follow the rules (I agree with peter Hamilton), while another says “the presumption must be the regulator knows what it is doing and its guidance is correct”. You know what they say, never assume (presume) it makes and ar@se of me and u. The FCA don’t have to even try to do that themselves!

  6. Its all a bit mad ! would you not agree ?

    Some-one looking in on this with any degree of common sense; well lets just say I would like to see the expression on their face.

    Even the FCA seems to contradict its self at every given turn, but rather that holding their hands up and admitting its wrong or needs more clarification, they continue to say they are right and implying they are indeed infallible; madness !!!

  7. Plus I agree with Harry and Marty above.

    I went to Canary Towers on Wednesday, average age in the room was probably about 29 with me being the oldest at 49 and they wonder why they cannot relate to the “average” rural adviser!!!! Last time I was in Stratford E14 or is it 15 was 1984…. little different now. First time to Canary Towers and hilarious. Should have heard what my (new) 22 year old apprentice said after we left the meeting, It was classic!

  8. I am the locum for another adviser who has discretionary permissions (my firm doesn’t have permissions), but BOTH of us have the discretionary qualification so I can actually DO his locum work. He doesn’t have Mortgage Qualifications so for a while he referred them to me, but I don’t like doing them and had started referring my mortgage work to another IFA who likes doing them. I now have two (nearly) qualified mortgage advisers, so we will take it back in house now. I know that mortgages and pension transfers don’t fall under the Independent problem, but should this not all be about what the client wants and needs?
    The client wants to come an Independent adviser they Trust to work within their own skill set and to refer when they are outside their normal area of practice. We ALL do the same level of qualification now (Lvl4) as a minimum, but we don’t all want or NEED to be Independent. For me, I need to be Independent and directly Regulated as no one in their right mi would EMPLOY me other than a client!

  9. The FCA seems to be overlooking the fundamental reality that there’s no such thing as a master of all trades (or, in this instance, a master of all products and product types and their best application). It simply can’t be done. Armchair theory still reigns supreme at 25 The Colonnade. As says Philip Milton: the FCA is not aware of how things function in the real world. How very true.

  10. There are lots of models that will serve customers well. One of those is certainly having specialists in a business and working as a team to provide the right advice to a customer. I was amazed when the FCA defined independence as they did- surely what they meant was that every advisors must be skilled enough to recognise when their holistic advice is not enough and where a customer is better served by someone in the team who specialises in a given area. We can’t all be specialists in everything. The FCA should reconsider their guidance and support all models for achieving independent advice for consumers and make it easier not harder for advisors to work together- surely that is better than advisors trying to be all things to all men and getting it wrong again?

  11. The fundamental flaw is that the definition of independence didn’t start with what client’s and could understand. There are a number of comments above that demonstrate that, even now, advisers don’t fully understand what the FCA’s definition of independence means.

    The definition is complex and technical in the extreme – you have to be able to understand what PRIPs are (and are not) just for starters.

    It is self-contradictory – it doesn’t include or account for many investments such as equities, corporate and government debt, pension transfers or long term care. Protection doesn’t even register.

    It is unclear and misleading. What chance clients?

    It is, at its root, fundamentally flawed.

    On top of this Peter Hamilton is correct and the FCA have misinterpreted their own rules in the guidance. There is a requirement within the Rules themselves that they must be interpreted on a purposive basis, i.e. look at what is trying to be achieved. If a client gets an independent service from a firm that happens to come from several advisers within that firm then that satisfies both the words and the purpose of the rule. The guidance is fundamentally wrong.

    To be fair there have been statements from the likes of Rory Percival that are more akin to what you might expect, e.g. that each client should be under the supervision of a single adviser who ensures that the service provided overall is drawn together to satisfy the overall requirement.

    The solution? Re-write the independence rule so that clients can understand it and bring back into the fold all advisers who are whole of market (providing any service limitations, not product) are clear. It would also sit much better with the idea, and surely one of the key RDR principles, of paying for a service rather than product advice.

  12. I’m a whole of market adviser who is restricted.

    I’m not restricted by my knowledge but by the regulators determination of the scope of the term independent.

    Would a client prefer a jack of all trades who can achieve a mediocre outcome for every area/product or an adviser who specialises in some areas and refers in respect of those where he acknowledges deficiency?

    Any sane person would opt for the latter but Canary Wharf remains an arid plan where the ability to think clearly and succinctly sends up only the occasional green shoot.

  13. Excellent point Jane, and hello to you as a former colleague I believe? I try to look at the common sense of things by pretending the same principles and guidelines used by the FCA were applied to a different profession.
    So let us take the legal profession as an example. If I worked for an “independent” legal practice I might find that the practice as a whole would advise on commercial law, employment law, private clients, medical negligence, patent law, property law and conveyancing, family law and litigation. So prior to the new guidelines there might be seven or eight partners, each specialising in a different area of law. The employment partner might deal with a company requiring advice on a merger and acquisition. This company then requires advice on the purchase of a new office building so he refers the query to a property lawyer. It then transpires that a client has launched a law suit against the company so the employment partner then refers the client to the litigation partner. After the guidelines, to be an independent legal practice each partner would need to be able to advise across the board, so the employment partner would need to be responsible for the legal advice in every single area just mentioned in order to retain his and the firm’s independent status. Is this sensible and would the legal profession allow this to happen? No and No.

  14. Has the regulator ever got anything right?

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