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Redefined independence

In August 2011 the FSA wrote to the Solicitors Regulation Authority advising of its decision to adopt a revised definition of independence as from 1 January.

By Ian Cockerill | Published Apr 26, 2012 | comments

It was also sent to the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland and the other professional bodies which were designated under the Financial Services and Markets Act 2000 as regulators of the non-mainstream regulated financial services activities of their member firms.

It invited them, if they felt appropriate, to adopt different definitions for their own purposes.

Both the solicitors’ body and the accountants’ bodies insist that client referrals by their member firms should be confined to independent financial advisers, and they currently follow the FSA definition of independence as providing a whole-of-market service and offering a fee option.

Inconveniently the FSA has chosen to redefine independence for the purposes of the retail distribution review. It no longer accords with the dictionary definition of the word on which the rules of the professional bodies are based. The reason behind the FSA’s letter was the realisation that if the designated professional bodies were to continue to follow the precedent of the FSA by adopting its new definition, this would cause problems.

The particular concern centres around stockbrokers, with who many professionals have long-standing relationships. As their representative body, the Association of Private Client Investment Managers and Stockbrokers, has pointed out the inability of many stockbrokers to advise on life and pensions would cause them to be classified as restricted. It would therefore preclude them from continuing to work with their solicitor and accountancy connections.

The concept of independence is particularly close to the heart of the legal profession. The underlying principle is that solicitors’ advice may be conflicted if they try to serve two masters, either by confining themselves to a limited number of sources of external advice, or by accepting remuneration from someone other than their client.

Based on this principle, law firms which are authorised by the FSA to provide financial advice to their clients are not permitted by the SRA to be tied or multi-tied agents of product providers or to be members of IFA networks. Law firms that are not FSA-authorised are required to confine their client referrals to independent financial advisers. To clarify this restriction, the SRA issued guidance in July 2009.

The irony is that the new definition will be incomprehensible to the consumers whose interests it is intended to protect. And, as has also been pointed out, if the same test were applied to solicitors, most of them would fail. This is because most choose to specialise in particular areas of the law rather than offering a whole-of-market legal service.

The SRA has yet to respond to the FSA’s invitation. It is more than pre-occupied at present with introducing a principles-based regulatory regime and handling the massive task of vetting applications from the many thousands of individuals who will need to apply for approval as compliance officers or non-lawyer owners or managers of law firms. It has consistently missed the deadlines which it has set itself and the parochial issue of reconciling its principles with the antics of the FSA is likely to remain low on its list of priorities.

What seems clear, however, is that solicitors cannot be expected simply to relinquish their stockbroker relationships. A way must be found to accommodate them. The soft option for the SRA would be to abandon the requirement for independence, as understood by everyone other than the FSA, and to expose solicitors and their clients to the attentions of tied and multi-tied salesmen.

Hopefully this possibility is remote because it would mean abandoning a core principle on which the legal profession has been built. In addition solicitors’ painful memory of having relied on the tied advice of Equitable Life salesmen may also influence the SRA’s thinking.

It has been argued by some firms which offer only restricted solutions that there may be too few independent advisers post-RDR to meet solicitors’ needs. However current indications suggest the great majority of IFAs will remain independent, and the FSA’s recent strictures against recommending unregulated collective investment schemes, except when justified by special circumstances, will have reassured many that the whole-of-market requirement may not need to be as demanding as had at first been indicated. The FSA’s promised consultation on Ucis will hopefully provide further clarity.

Solicitors Independent Financial Advice has suggested to the SRA that the best solution would be to retain the current prohibition against solicitors referring clients to ties and multi-ties. This would be consistent with the ongoing requirement for law firms to maintain their own independence. The 2009 guidance needs only tweaking to accommodate the change from rules to outcomes-focused regulation.

But can one assume that the established principles of the legal profession will be ongoing? One of the principal objectives of the Legal Services Act 2007 was to improve access to justice and to address the issue that an estimated 40 per cent of the UK population never seek legal advice, mainly because they think they will not be able to afford it.

To address this issue, the act empowered the new overarching legal regulator, the Legal Services Board, to enable professional bodies other than the SRA to act as front-line regulators of legal services. There are currently no fewer than 10 such regulators, including the Institute of Legal Executives, the Council of Licensed Conveyancers, the Bar Standards Board and even the institutes of chartered accountants.

Members of these bodies will be practising on a level playing field with solicitors, despite what in many cases will be less-demanding qualification requirements, and while access to justice may be improved, it is as least arguable that standards of legal advice will inevitably suffer. So who is to say what stance these other bodies will take in relation to client referrals for financial services?

The positive is that the strength of the solicitor brand as the gold standard for legal advice is likely to be reinforced. And to the extent that the Legal Services Act is encouraging participation by non-solicitors in SRA-regulated law firms, the need for the non-solicitors to share solicitors’ own commitment to independence is likely to be a key regulatory requirement and to continue to dictate law firms’ external referral relationships.

It could indeed be argued that the result of the FSA’s obscure redefinition of independence, combined with the minimal gesture required of restricted advisers in respect of status warnings, will make independence irrelevant except in the context of professional referrals.

However most advisers who opt for independence do so instinctively as a matter of personal principle because they wish to do the best for their clients, free from the influence of third parties.

Clients reciprocate by placing their trust in independent advisers, and in the multi-disciplinary world which is evolving in the wake of the Legal Services Act. The pivotal role will be that of the trusted adviser who co-ordinates the required professional inputs on an holistic basis.

Ian Cockerill is compliance director of SIFA

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