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”.
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.”
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 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.
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