SMCR review could be welcome news for advisers

As reported by FTAdviser, it had scheduled to do so by the end of Q1 2023. 

In December, unveiling the so-called Edinburgh Reforms, the government said it would publish the call for evidence alongside a separate joint discussion paper by the regulators.

These reviews will cover the effectiveness, scope, and proportionality of the regime, which is currently set out in primary legislation and the regulators’ handbooks.

FTAdviser understands this will be an open review, seeking feedback on the overall aims of the regime as well as on more specific aspects including its scope and whether it affects the UK’s competitiveness.

The regime can leave self-employed advisers exposed as their ability to offer advisory services to clients is wholly dependent on a firm’s decision to certify them.Jill Lorimer, Kingsley Napley

This may in turn help those advisers who have found themselves stuck between a regulatory rock and a legal hard place when the business for which they work has refused to certify or re-certify them since the SMCR came in.

One adviser, known to FTAdviser as Adviser A, said they were left in a difficult position with no recourse but to take legal action, after selling the business to a successor who refused to certify them to continue working through their phased retirement.

The adviser who now owns the business did not provide reasoning for why Adviser A would not be certified, and has left the former owner with no recourse but to take it to the courts - a costly option, as reported previously. 

Conduct rule complexity

When SMCR was launched, firms needed to ensure individual IFAs in the firm had a sound knowledge of the Conduct Rules, which had been drawn up but more work would need to be done before final certification on December 9, 2020.

One industry expert took to Twitter and said SMCR has undoubtedly been a pain to implement but it is here now and has cost a lot for firms to onboard.

According to the regulations, under section 63F of the Act, if, after having considered if a person is fit and proper to perform an FCA certification function, a firm decides not to issue a certificate to that person, the firm must give the person a notice in writing stating:

• what steps (if any) the firm proposes to take in relation to the person as a result of the decision; and
• the reasons for proposing to take those steps.

If, after having considered whether a person is fit and proper to perform an FCA certification function, a firm decides not to issue a certificate to that person, it should consider if the circumstances warrant making a notification to the FCA.

But Adviser A said while the FCA has set up regulations which delegate certification authority to firms, there is nothing in the regulations which can allow advisers to appeal, especially when they feel a firm has abused its authority or failed to re-certify staff because of financial constraints or other reasons.

This can have implications on advisers who want a succession plan and put someone else in charge of their business - especially if they end up not being renewed as a regulated adviser by their appointee.

In this case, as Adviser A told FTAdviser, the ethics behind a decision not to certify are questionable, especially since a verbal or spoken contract has been broken. 

I see this as primarily an issue with the firm rather than the FCA.Michael Stacey, partner at Russell Cooke

However, the FCA said if a firm does not issue a certificate when it could or should, this would generally need to be dealt with via employment law (for an employee) or general contract law (for someone who is self-employed).

As a large number of advisers are self employed, they cannot take their case to ACAS, the employment arbitration service, which in any event, deals with employment and not regulation.

The regulator has told FTAdviser there is a legislative requirement for firms to assess the fitness and propriety of their staff and certify them as such.

A spokesperson explained that this is key to ensuring individuals such as financial advisers or pensions advisers possess sufficient knowledge and competence to do their roles and to protect customers from harm.

Where a firm assesses fitness and propriety but decides not to issue a certificate, the Financial Services and Market Act makes clear the firm should set out to the individual what steps will be taken and why.

But again, this cannot help Adviser A or others who may have found themselves in similar situations as they make a phased exit from the advice profession.

Legal aid

FTAdviser spoke to a number of legal experts on the matter to understand where this leaves self-employed IFAs.

Michael Stacey, partner at Russell Cooke specialises in regulatory and public law.

He said: “I see this as primarily an issue with the firm rather than the FCA. The FCA has put in place the certification regime to protect consumers where the nature of the service being provided means there is a significant risk of harm. 

“The obligation is on the firm to ensure that only individuals they have certified as fit and proper perform certain roles.”

Advisers who are locked into contracts with firms who refuse to certify them should take legal advice.Jill Lorimer

Stacey explained that there are many regulated professions where it is a requirement to meet certain conditions and/or obtain particular qualifications before being permitted to provide services (e.g. the legal profession and medical profession). 

“In this case the individual hasn’t “lost their livelihood” in the sense of being prohibited by the FCA from carrying out his role,” he said. “The firm has decided not to certify them. 

“They could work at another firm that was prepared to certify them or they could seek their own authorisation from the FCA – in other words there are other routes available for them to meet the relevant regulatory requirements.”

And if an adviser did take it to the courts, Stacey said the cost and time in relation to a refusal to certify would be substantial and likely to run into the tens of thousands of pounds.

“For that reason the better option for the individual would be to seek an alternative route to obtaining certification,” he said.

Importance of getting a contract

Likewise, Jill Lorimer, financial services regulatory partner and head of the financial services practice at law firm Kingsley Napley, said: “Under SM&CR, the onus is on the firm to certify its advisers as fit and proper, whether they are employees or contractors. 

“The regime can leave self-employed advisers exposed as their ability to offer advisory services to clients is wholly dependent on a firm’s decision to certify them. 

“It is therefore really important that these advisers ensure that their contracts commit the firm to certifying them in the absence of a good reason not to.”

Lorimer said self-employed advisers should also check the FCA’s on-line register - which now lists all certified individuals - to ensure that their names appear under the firm’s entry.

“Advisers who are locked into contracts with firms who refuse to certify them should take legal advice on whether they might have a breach of contract claim against the firm,” she said.

Therefore any amendments to SCMR that may be passing through parliament now might close up this potential pitfall for advisers in the future. 

Meanwhile, it is important for advisers to take care when creating an exit strategy, and make sure that any contract explicitly makes provision for them to be certified by the firm for the handover period.  

sonia.rach@ft.com

What do you think about the issues raised by this story? Email us on ftadviser.newsdesk@ft.com to let us know