The Financial Conduct Authority (FCA) has provided clarification of one important issue concerning the independence or otherwise of financial advisory firms. Back in March 2014, the regulator surprised many by saying in a thematic review that each individual adviser within a firm had to be able to individually advise on all products for the firm to be considered as independent, but it now appears that the regulator no longer believes this to be the case.
The relevant sentence within the review document read: “Every adviser in an independent firm must give advice that meets the independence rule if the firm holds itself as being independent.” The only permitted exceptions, according to this review, were for occupational pension transfers and long term care insurance cases.
Some advisers, commentators and experts questioned this, saying that all previous FCA correspondence had indicated that the independence definition would still be satisfied if the original adviser passed the case on to a colleague within the firm who had more expertise in a particular area. Peter Hamilton, a barrister specialising in financial services, even went as far as to suggest that firms should ignore the thematic review. Chris Hannant, director general of the trade association the Association of Professional Advisers, suggested that the guidance could prevent independent firms from taking on trainee advisers.
Now, in late September 2014, the FCA appears to have backtracked on its previous position. It has issued a statement saying that a number of firms have suggested that passing cases on to product specialists within the same firm is both acceptable under existing rules, and likely to lead to improved outcomes for customers. The regulator says it agrees with this feedback, and now says that: “firms can use internal specialists if they have appropriate systems and controls in place to ensure that personal recommendations provided by their advisers meet the required standard.”
The March 2014 thematic review has now been amended so that a disclaimer appears in section 4 under the heading ‘Referrals to other advisers’. This asks firms to disregard the text which follows, and instead invites them to look at guidance issued by the Financial Services Authority in 2012.
FCA director of policy David Geale said of the apparent change of heart:
“The FCA and the industry may not always be in agreement, but we aim to be responsive, provide insight into our thinking and where necessary, consider issues again.”
In summary, the FCA has clarified that it is the firm which needs to meet the independence definition, not each individual adviser within the firm. Firms still need to make sure that, for every client who seeks investment advice, all relevant products are considered before a recommendation is made, and that sufficient providers are considered to represent a ‘comprehensive and fair analysis of the market’. The independence definition encompasses products such as:
- Life insurance based investments, such as investment bonds
- Collective investment schemes
- Stakeholder and personal pensions
- Unit trusts
- Investment trusts
- Structured investments
Firms should also note that the other issues mentioned in the thematic review remain valid. For example, it is still the case that it is not acceptable to consider a limited range of products and remain independent; nor is it possible to be independent while making exclusive use of a single investment platform.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.