In March 2014, the Financial Conduct Authority (FCA) published a report on the second part of its thematic review into whether firms it regulates have implemented the provisions of the Retail Distribution Review (RDR).
The RDR was introduced at the start of 2013 and banned financial advisers from receiving commission payments and set new qualification standards for them to attain. It also introduced a new definition of ‘independence’ and it is this which is the only subject of the latest report.
Anything less than reviewing the whole of the market for all required investment products is considered to be restricted advice.
The FCA says that: “a significant number of firms understood the requirements for delivering independent advice and appeared to be delivering it in practice.” However, the report also indicates that some firms gave the regulator cause for concern in this respect.
During the review, information was requested from 113 firms, of whom 25 said they were not independent and offered only restricted advice.
Of the remaining 88, the FCA said it was certain that 2 firms were not meeting the new independence definition, and that it had doubts over another 28 firms in this respect. 17 of these 28 firms were then investigated in more depth, and 6 of these 17 were able to convince the FCA that they were in fact independent. Another 6 were described as ‘not acting independently’, while doubts remained over the other 5. So in summary, the FCA identified 8 firms amongst the 88 who were definitely not independent, and another 16 who may not be independent.
All firms are urged to read the many examples of good and poor practice given in the report, and consider whether to adapt their policies and practices as a result.
Examples of good practice cited by the FCA include:
- Considering investments outside of investment platforms where appropriate
- Having a range of risk-rated model portfolios for different types of client, with the ability to recommend investments outside of these portfolios if they suited the client
- Using whole-of-market research tools
Examples of poor practice include:
- Each adviser making excessive use of their own favourite investment platforms
- The firm saying they could recommend off-platform solutions, but their advisers were unsure as to the process for doing this
- Using a single model portfolio for all clients
- The firm being unwilling to advise on certain product types
- Individual advisers being unwilling to advise on certain product types. This is not independence, even if they refer them to other advisers within the firm for certain products.
The head of the main advisers’ trade association suggested some advisers were still confused as to what constituted independence. Chris Hannant, Director General of the Association of Professional Advisers, said: “We welcome the FCA’s findings that the vast majority of advisers are meeting the required standards, including smaller firms. That so many companies have successfully met some of the most stringent regulatory changes in a generation is testament to their professionalism and diligence. However, the fact that the review contains a further twenty pages of guidance for firms only goes to highlight some of the problems with the regulator’s definition of independent advice.”