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FSA must stop equivocating on independence guidance

Can anyone clear up this nagging independence issue before it’s too late?

By Michael Trudeau | Published Sep 06, 2012 | comments

I have some concerns about independence, due diligence and relevant markets.

Some advisers are clearly under the impression that they will be able to offer a pretty much passive-only model and still call themselves independent.

There are two ways they can do this, in theory: ongoing reviews of the wider market that lead to the conclusion active funds are not suitable for an adviser’s entire client base, or identifying this as a ‘relevant market’.

With regards the former, an adviser produces template paperwork based on ongoing reviews of the investment universe showing that they have considered the whole of market for their given client segments and, after such consideration, have ruled out all active funds.

Then they continue to apply this paperwork with every new client, essentially claiming that this initial stance continues to apply (assuming, of course, that it does).

This may smack of exploiting a loophole, but if it genuinely reflects the client’s best interest then surely it does them no disservice.

With the latter method, the regulator started with three very well-defined, easy-to-identify markets: Islamic-only, retirement-related and ethical-only investors. Fine. But it doesn’t take long to get into some very murky territory.

When I asked if an adviser could call passive-only investors a relevant market, the Financial Services Authority said probably not. But why not?

The reason I got was, basically: “because”. Passive-only apparently isn’t a relevant market, but by what standard?

Surely the examples given in the guidance aren’t exhaustive, but what process will the regulator use to determine if a given investment type - which might otherwise force advisers under the restricted banner - could be defined as a relevant market?

What about investors who only want to put their money into Aviva products? What about investors who only want products beginning with “S”?

Sorry to be ridiculous, but sometimes taking something to a farcical extreme can help illustrate a point: how is the FSA going to decide what is a legitimate relevant market and when a ‘restricted’ adviser is simply playing at independence?

The FSA told me it would be handled on a case-by-case basis. That’s fine - after all how else could they possibly handle it - but advisers who are busy planning their business models for January need some kind of predictability.

I just don’t have lot of faith in such a judgement-based, subjective system.

In theory, for advice to be ‘independent’ it needs access to the whole of market. This could mean that, while you use passive 99.999... per cent of the time, you have to be able to step out of that mold at any moment if doing so better suits the client.

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