In April, we published our thematic review on how firms had implemented the ‘independence’ standard (TR 14/5: Supervising retail investment advice: Delivering independent advice) as part of the Retail Distribution Review.
We were pleased to see how firms had responded to the rules and that most of those that described themselves as independent appeared to be using the label accurately.
However, before, and following its publication, questions have been raised about the independence rule and, in particular, the use of specialist advisers and referrals within firms.
This is an important issue so we’ve consulted with industry, considered seriously the questions raised and have also reviewed the scope of the independence rule and its implications for clients.
Having looked at all of these points, we agree that a wider interpretation than previously described - including in the recent thematic report - is possible under the existing rules.
The independence rule
It’s first worth reiterating what our independence rule seeks to achieve. To be independent, a firm should be able to consider all types of retail investment products that could meet the needs of a client. What’s more, they can’t be restricted by which product provider they use.
We set this standard so that potential investors who turn to an independent financial adviser can be assured that the advice they are given will be genuinely free from any bias; and that advisers areableto recommend any product on the market that suits the client’s investment objectives.
In short: it’s about having a service which meets customers’ reasonable expectations of the service an independent adviser will provide.
However, questions have been raised about how this independence rule applies where referrals are made to specialist advisers within the firm.
Referrals to internal specialists
In our discussions with industry some have suggested that the use of specialist advisers within a firm could improve client outcomes. The argument goes that advisers may, often routinely, refer their clients to a colleaguewith particular expertise or experience, such as income drawdown.
Having looked again at this issue, we agree that this wider interpretation of our rules is possible.
To be clear: we don’t have an issue with firms using their own specialists. However, firms must have appropriate systems and controls in place to ensure that personal recommendations provided by theiradvisers meet the required standard.
There are many ways in which this could work, but one example is how some firms work with advisers who are inexperienced, perhaps having recently qualified. Firms can remain independent and put in place mechanisms, such as licensing of advisers, to control the quality of advice on certain investment products such as higher risk products that are rarely going to be suitable for the firm’s clients.
There are further such examples in the guidance that the FSA published on the topic in June 2012.
What next
Given the discussions we’ve had with industry we saw there was a need to correct recent statements on operation of the independence rule, which did not match the original intention of the rule.
While the FCA and the industry may not always bein agreement, our aim is to be responsive to feedback, and, when advisers think it helpful, we’ll publish more information and insight into our thinking. Sometimes, we’ll also consider issues again.
Our hope is that having revisited the independence issue and explained more clearly our intentions under the rule, we will helpfirms to get the best outcome for their clients.
More broadly, over the next few months we’ll be gathering more information on how the RDR has been implemented and what effect it is having.
We have just begun work on the third and final cycle of thematic work looking at how advisers are disclosing charges and services, and how they design, disclose and deliver post-advice services. In addition, we have started a full post-implementation review of the RDR to get a complete picture of what impact it has had on advisers and consumers.
There are also some potentially important developments in Europe. We have been actively involved in the process of negotiating Mifid II, which will come into effect in 2016.
This makes specific reference to independent firms and so, among other things, may result in changes to our current definition of independence. We are therefore aware that this issue is one where there could well be further developments.
For further information, please refer to the guidance issued by the FSA in 2012.
David Geale is director of policy at the Financial Conduct Authority
