Barrister Peter Hamilton has said that firms should ignore a recent piece of guidance from the Financial Conduct Authority (FCA) regarding adviser independence requirements. Mr Hamilton believes that the FCA has mis-interpreted its own rules on the subject.
In March 2014, the FCA published a thematic review on the subject of whether firms were meeting the new independence definition introduced in the Retail Distribution Review (RDR). This definition requires firms to consider a wide range of different products in order to be considered independent.
In the review, the FCA said individual advisers could not consider themselves to be independent if they passed on certain cases to other advisers, whether inside or outside the firm. The only permitted exceptions are occupational pension transfers and long term care insurance cases, where advisers may pass the case on to ‘specialists’ in these areas without contravening independence requirements. The review also said that advisers could seek the assistance of colleagues, provided that the final advice was still given by the original adviser.
The review summarises the situation by saying: “Every adviser in an independent firm must give advice that meets the independence rule if the firm holds itself as being independent.”
However, the relevant section of the FCA Handbook reads
“A firm must not hold itself out to a retail client as acting independently …”
which suggests that under its rules, it is the firm that the independence definition applies to, not the individual advisers. So one possible interpretation could be that, provided the advice is still given by the original firm, it can still be considered independent advice even if the original adviser passed the matter on to a colleague.
Mr Hamilton certainly takes this view, and has said:
“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.”
Boldly, he calls on firms to fight the FCA over this should they be held to account.
“If the FCA tries to discipline advisers for this then firms should stand up to the regulator,” added Mr Hamilton.
Chris Hannant, director general of the trade association the Association of Professional Financial Advisers, indicated concern over what the March 2014 guidance means for firms taking on trainee advisers, and also expressed his frustration with the general lack of clarify from the FCA on the subject of independence.”
“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,”
commented Mr Hannant.
Other legal professionals urged firms to treat Mr Hamilton’s remarks with caution. DWF Fishburns partner Harriet Quiney said:
“To ignore the FCA’s guidance on the basis you think it is wrong is risky and firms do so at their peril,” while Pinsent Masons senior lawyer Michael Ruck said: “It is going to take a brave firm to ignore the thematic review.”